It's too early to dump Chinese stocks, Citigroup tells investors

By Staff Writer

Feb 03, 2016 04:20 AM EST

At a time when investors are wary of future course of Chinese stock markets, Citigroup Inc advises them not to dump stocks in panic. Citigroup says though China is the center of many concerns, it's too early to write off the dragon country as it's more as a correction. 

Citigroup Inc in its latest research report advises investors not to dump stocks over China. Investors were told not to jump to any conclusion about the world's second largest economy. China's potential to drag the global economy into recession shouldn't be undervalued, observes Citigroup in the research note. "The market response in form of a global rout should be interpreted more as a 'correction,' the report stated.

Bloomberg reports that the data pertaining Chinese economy has not worsened the situation materially, but what's disturbing is uncertainty over the policy response. Particularly the Chinese currency devaluation and its impact on the global markets were negative. However, how much of this priced into markets is not yet clear, said the Citigroup's report. 

With $16.3 billion of assets tied to China, JPMorgan is second largest US bank having exposure to the dragon country. These assets recorded 18 percent drop year-on-year basis. This includes $8 billion in loans. Bank of America has $12.5 billion in assets tied to China and suffered from eight percent losses. San Francisco-based Wells Fargo booked only $2.4 billion assets tied to China as against its total market capitalization of $150 billion. 

Citigroup is among top four US banks, which have exposure to China. Citigroup booked over $20.5 billion in assets tied to China, as per a filing to SEC, including $14 billion in loans and $7 billion in securities and trading account assets. The total assets fell eight percent this year so far.

China's central bank has started pumping in more liquidity into the financial system. The Shanghai Composite Index rose 2.3 percent to 2,749.57 points. It's estimated that the central bank released Yuan 100 billion ($15.2 billion) in short-term loans to money markets, as reported by Market Watch. The Chinese markets would be closed for a week on account of Lunar New Year starting from 7 February. Shanghai index fell 47 percent since June 2015. 

Mark Schofield, Managing Director for the global strategy and macro group at Citigroup Global Markets, said: "Clearly China has been at the centre of much of the concern, but what really matters for global markets is the extent of contagion from China's slowdown. This ageing bull market has clearly stalled, and faces considerable headwinds. But, it is too early to call its demise."

However, Citigroup managed to post positive numbers for the last quarter of 2015. Citigroup posted net income growth $3.3 billion for the fourth quarter of 2015 from $344 million in fourth quarter of 2014. The revenues rose nine percent to $18.5 billion in fourth quarter of 2015. The higher revenues and lower operating margins helped Citigroup improve financial performance.

CNBC reports that investors are scared of China stock markets. Adding to this, latest online investment scam is further creating tremors among the investors. The peer-to-peer online investment firm Ezubo was allegedly caused the largest online fraud in China. Recently Ezubo was named 'online credit financial brand of the year' by China's national business daily in 2015. 

Many investors parked their money in Ezubo going by the advertisements and awards in the state media and other channels. Chinese officials arrested 21 suspects involved in Ezubo and its parent company Yucheng International Holdings Group. It's allegedly mobilized over Yuan 50 billion ($7.6 billion) from investors, according to state news agency Xinhua. Now, the investigation is going on.

The Chinese currency Yuan fell 5.6 percent since its unexpected devaluation in August 2015. China's central bank has offloaded $321 billion of foreign exchange (forex) reserves to support the falling currency. Citigroup forecasts further drop in Yuan, while Chinese officials are confident of stable currency. 

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