Courtesy of RBS:
Click to enlarge. Read more
Chinese equity markets are nuts. And the search for a narrative to explain this week’s moves is becoming ever nuttier. As Deutsche said: “It ceased to be a free market a long time ago so analysing it is tough”. Read more
Chinese equity markets have continued puking. Yes, they’re still up on a longer timeframe, but were off a sudden 8.5 per cent on Monday, the worst fall since 2007. The Shanghai Comp now looks like this:
As the FT said, the Shenzhen Composite sank 7 per cent, and the ChiNext start-up board dropped 7.4 per cent. Significantly, more than 1,700 stocks fell by the maximum daily amount of 10 per cent, while only 78 rose. Large caps like PetroChina, the country’s largest company by index weighting, lost 9.6 per cent. Xinhua has thus declared the “The return of debacle!”.
So a reminder of the constraints that China’s powers-that-be are labouring under seems more than appropriate. The point is that, as quoted below, “what just happened in the A-share market will likely have profound impact on China’s economy and financial system one way or another”. Read more
It was the worst fall since 2007 and the second worst fall since 2000, chart courtesy of the FT’s Peter Wells:
Or as China’s Xinhua is putting it — “The return of debacle!”: Read more
We hate to concentrate on the dives alone, but this is getting serious. We’re off 8 per cent at pixel and on track for the biggest one day fall since 2007 — there was an 8.23 per cent drop on April 6, 2007 according to Fast — click through for the live Google finance price:
The Shenzhen Comp is off 7 per cent, CSI300 is also off by the same amount and Asian equities are generally looking unwell. We’ll update this post as we go, particularly as this could rally into the close.
Bigger than Greece, bigger than China (or at least one of the most significant parts of the China story) is the massive shift occurring in global currency reserves. Long story short: they’re being depleted, rapidly. Especially the reserves of emerging market sovereigns.
On Thursday we suggested the evolving dynamic could be linked to a contraction of petrodollar/sweatdollars in the global monetary system, thanks to growing US energy independence and US labour/tech-based re-shoring.
We failed to mention, however, how the situation is exacerbated by China’s growing inability to throw renminbi at its export competitiveness problem due to not insubstantial dollar leverage exposure on the country’s books. Which is to say: China can only help its exporters — and by extension other emerging markets — by shedding a whole bunch of dollar reserves at the same time. Read more
That’s Citi, protesting. We’ll leave it to you to decide if it’s too much:
Sentiment indexes are in despair and investors want to get more bearish still — It is rather strange that an asset class which is already in despair according to our sentiment indicators, and where valuations range from 1 stdev-below-mean to mean in terms of P/BV, and yet fails to generate much investor interest. On the contrary, as sentiment has worsened and valuations have fallen, investors have become more dismissive of the asset class. This is no truer than when it comes to the China. A market, which is either in a bubble or collapsing, and sometimes doing both the same day according to the bears….
The Chinese market corrects and the bears come out of hibernation all at once. Having been temporarily silenced by the rising market, all one needs to do is open a reputable newspaper or look at Bloomberg and you’ll get your fill of China doom and gloom. And while the momentum is down, why not extend the pessimism to all EM, which after all is just one big China trade anyhow? China and the EM asset class is doomed and for all the pulp and paper in the world there aren’t sufficient hankies in the world to mop up this mess, it would seem.
As above, we got a 7 per cent print for Q2 GDP growth in China last week. Here’s the breakdown from CreditSights — do note the weakness generally vs the contribution from the financial sector. As CreditSights say “The finance sector’s contribution grew by over 20% in 1H15 this is no thanks to the banks and more likely due to profit growth at securities firms and possibly asset management companies. In contrast, the industrial sector, which contributes over a third to GDP, is growing at under 2% YoY.”
Of course, it’s real (ish) activity but it most probably isn’t going to be repeated at that level and without it GDP would have been down closer to 6 per cent, according to UBS.
Which is all interesting stuff, but it’s not why we’re here. Read more
Classic bullish/ bearish signal with obvious buy/ sell implications.
As Bernstein say:
The rebound over the last week means we have entered a period where everyone was right. China bulls can argue that the Shanghai Composite is still up 94% over the last twelve months. China bears can argue that the Chinese regulators have effectively taken the market out of consideration by virtue of the ham-fisted approach to reversing the sell-off. However, “I told you so” doesn’t constitute an investment recommendation.
The broad narrative of a coming capital account liberalisation in China has always bugged us. The main reason being that we couldn’t see how China, in its current state, was going to start letting money flow (easily) out as well as in.
But before we get into that we should note, somewhat counterintuitively, that China’s capital account is already fairly liberalised. Read more
It looks increasingly likely that the latest Chinese stock boom (now abating) was fuelled by a rush of margin financing rather than anything like fundamentals, turning the whole thing into a bit of a house of cards (you don’t say), but just in case you have doubts, here’s UBS’s Lu Wenjie presenting some supporting evidence.
First, a chart and some factoids:
Credit Suisse would like to direct your attention away from that 7 per cent growth figure and back towards “China’s combination of a triple bubble (with the third biggest credit bubble, the biggest investment bubble and second biggest real estate bubble of all time)” which “remains the biggest risk to the global economy.”
From their global equity strat team (with our emphasis): Read more
We’ll get to the hidden debt stuff below. But, first, an update on the health of the Chinese economy from your friends at China’s statistics bureau.
The poor fellas had to deal with a median expectation among analysts of a 6.8 per cent print for China’s Q2 GDP growth. Frankly, that betrayed a disturbing lack of confidence in China’s leaders. Leaders who eventually nailed it with a reading of 7 per cent — bang in line with Li Keqiang’s predictions for full year growth.
Of course, as per Capital Economics, these data are going to do three main things. First, bring attention to a smattering of recovery in the broader economy including some stabilisation in fixed asset investment after growth had slowed for nine of the previous 10 months.
But, more importantly, they will underline the trouble with Chinese stats — always watch the trend not the figure — and draw attention to the unsustainable contribution being made by the financial sector: Read more
What role did margin calls play in the Chinese market in recent weeks? In particular, margin calls against shares pledged as collateral by controlling shareholders, unleashing a wealth destroying vicious circle?
Following on from our previous post attempting to answer those questions, we bring you a chart, by way of Pravit Chintawongvanich, derivatives strategist at Macro Risk Advisors:
We suppose you’re probably looking at something like this and may v well already be washed out…
On China’s innovative approach to mangling its markets — and whether it’s a dead-cat bounce — here’s SocGen’s Albert Edwards (our emphasis):
Regular readers will know I feel a close affinity with Karachi, my father having grown up there in the 1920s. I have subsequently been to the city many times, visiting a former fund manager colleague and good friend. I also sent my son there when he was 16 to help teach English at an excellent local charitable school foundation (TCF) in a Karachi slum so he could appreciate the value of education – link. Hence in 2008 while the global financial markets were in chaos my attention was drawn to the bizarre events in Karachi more than most commentators.
A couple of years back, the highly regarded Pakistani Dawn newspaper reviewed events in 2008: “In that fateful year, the Karachi stock market index of 100 shares had galloped to touch its all-time high level of 15,760 points on April 20, 2008. And then the stock prices collapsed with index plunging by some 6,600 points or 40% in four months. As panic was thick in the air, an entirely insane act was performed. On August 20, 2008, a “floor” was fixed at the level of 9144 points below which the index was not allowed to fall. All investors, including foreigners who wanted to seek an exit were trapped.
From the FT’s James Kynge:
On Sunday, the new graduates of Tsinghua University are set to gather in their smartest attire to celebrate degrees from one of China’s most prestigious institutions, a place that has fostered generations of political leaders. Just after the ceremony starts — according to a written agenda — the graduates must “follow the instruction and shout loudly the slogan, ‘revive the A shares, benefit the people; revive the A shares, benefit the people’.”
This is something we’ve banged on about before — that there is always a cost to exchange rate movements and in China, where stability of the system is so highly prized, those costs can get unacceptably high very quickly. We argued that case where capital outflows were concerned and now Deutsche’s Alan Ruskin is doing the same with the recent stock market turmoil in mind.
Analysts are certain that the “super-bull” run in Chinese clickbait has to stop sometime.
But not just yet.
Courtesy of BofAML’s Hartnett:
As it says on the tin:
The median return of the China A-shares over 12 months to the market peak on 12 June is 200%. 185 companies are in the top 10 percentile; the median return is 410%. These companies declined by 57% from the peak on 12 June to 7 July. SHCOMP, SZCOMP and Chinext were down 28%, 38% and 40% during the same period…
And here’s Credit Suisse, with our emphasis:
When a central bank says “whatever it takes”, we think the market should listen. The US Federal Reserve did so in 2008 and the European Central Bank did so in 2012. Is it the People’s Bank of China’s turn now?
Marginal Revolution’s Tyler Cowen presents the following as his question of the day:
How many China share halts r due to shares pledged as collateral by controlling shareholder who now faces loans called in and losing stake?
It is, of course, an excellent question. And we say to ourselves, if only we had the data.
But there’s another dimension to this sorry saga. The effect of margin calls on what may mostly have been circular paper-wealth effects (rather than real economy wealth effects) for such shareholders in the first place. Read more
Deng Xiaoping’s statement on stock markets during his Southern Tour included the legitimation to pursue stock market development: ” … some people insist stock is the product of capitalism. We conducted some experiments on stocks in Shanghai and Shenzhen, and the result has proven a success. Therefore, certain aspects of capitalism can be adopted by socialism. We should not be worried about making mistakes. We can close it [the stock exchange] and re-open it later. Nothing is 100% perfect.” (Deng Xiaoping as translated and quoted in Henry M. K. Mok (1995), p. 24.3.)
With that in mind, a China update in two-ish points. First, from Simon Rabinovitch over at the Economist:
With so many shares suspended or halted because down by daily limit, just 11% of stocks in China (300 of 2776) are actually tradable now.
— Simon Rabinovitch (@S_Rabinovitch) July 8, 2015
From Deutcshe’s Jim Reid this morning:
The measures implemented over the weekend now feel like a distant afterthought. In the meantime the nations’ media has again tried to lend its support to calm nerves with the Securities Journal this morning suggesting that the Chinese economy has the basis of a long-term bull market, while yesterday’s People’s Daily reported a headline ‘Confidence is more precious than gold. That’s what Chinese investors need at this moment; confidence, not panic’
Here’s a puzzle. Neither the Chinese stock slide or the Greek ‘no’ vote are having much of an effect on the gold price — odd given that the goldbug narrative that gold always performs well in a crisis:
Assuming that everyone can keep two economic train-wrecks in mind at once, we’d like to direct your attention away from Greece and over to China and its plunging equity markets.
We would have done so sooner but have a rule, rarely broken, that stops us writing about Chinese stocks before markets close. It’s called the ‘don’t write about Chinese stocks before markets close because they can be relied upon to immediately move and make you look like a jerk’ rule.
Still though, they’re closed now.
So, consider this from Citi: Read more
Chinese regulators have markets exactly backwards.
Late on Thursday they announced an investigation into manipulation by short sellers, while the futures exchange seems to be discouraging people shorting, or betting on price falls.
In practical terms, the action failed: stocks fell again, leaving them down 12 per cent on the week and down more than a quarter from their peak three weeks ago, with extraordinary intra-day swings.
In principle, though, the action is just wrong. The reason the stock market is falling isn’t short sellers, it’s long sellers. More precisely, the hordes who’d been piling into stocks and pushing prices through the roof over the past year are selling, and that was entirely predictable (the difficult issue was when there would be a rout, not whether there would). Read more
Right, so today the Shanghai Composite is up 5.6 per cent, Shenzhen is up 4.8 per cent and ChiNext has gained 6.3 per cent. And we have no idea what’s going to happen tomorrow
Over the past few days we got a clear government push to keep this thing up — including pushing something like an extra RMB1tn into the system via RRR and benchmark rate cuts over the weekend and, today, fund managers being told to help out — but it’s unclear how long that can keep things contained following near 20 per cent falls in these markets since their (admittedly v impressive) peaks in early June.
As of yesterday it was: not much at all as markets tumbled. As of today it’s: a bit more than that as they don’t.
To help clear things up, here’s Anne Stevenson-Yang of JCap Research with her most recent note: Read more