China’s markets are primed for extreme volatility in 2023

Bloomberg

When China’s securities regulator vowed to reduce market volatility in January, few predicted that this year would be one of the most turbulent in recent memory.
The drama has only increased this quarter, setting the scene for more upheaval in 2023.
Chinese stocks are now moving by 5% a day more frequently than anytime since the global market meltdown of 2008. Volatility in the offshore yuan is near a record. And the cost of insuring Chinese government debt against default has been at multi-year highs.
While market consensus is that Chinese assets will rise over the next 12 months, catalysts for extreme shifts in sentiment remain everywhere: from the risk of overwhelming infections as Covid Zero rolls back, to the lingering property crisis and a regulatory culture that never ceases to spring surprises. China’s relations with the US are still fraught, and the economic outlook at home and abroad is more uncertain than ever.
Traders who were burned after placing bets on a China rally this time last year are back. But they are far more cautious. The Hang Seng China Enterprises Index fell as much as 3.1% on Monday, leading losses in Asia, while the yuan weakened.
“It’s not going to be a one-way smooth ride,” said Keiko Kondo, head of multi-asset investments for Asia at Schroder Investment Management in Hong Kong.
“Investor sentiment is still quite fragile — one thing people don’t want to have is too much volatility. That is why we haven’t gone all the way to overweight on Hong Kong and mainland shares.”
Traders are expressing their caution by piling into derivatives that will pay out if stocks and the yuan come crashing down, while building a hoard of those that should profit if these assets soar.
The HSCEI Volatility Index, which serves as a barometer of fear for the Hong Kong stock market, is up 55% this year and far above its average over the last decade, even after sliding from its October high. While all global markets have seen volatility, the equivalent VIX gauge for US equities is well behind with a 33% increase since the start of 2022.
“2023 is not going to be easy,” Kieran Calder, head of equity research for Asia at Union Bancaire Privee, said. “We’re cautiously optimistic on reopening in China. The big swing factor is how China gets out of Covid and how fast.”
Bulls are building their case on Beijing’s refocus on the economy as officials consider a 5% growth target for 2023.