China Crashing: Shanghai Composite Tumbles Most Since 2009
24
June, 2013
Those
who have been holding their breath until China joins the overnight
market fireworks can finally exhale.
Following
yesterday's unprecedented formal
announcement of
epic capital misallocation, the PBOC tried to
continue the damage control when a few hours ago it announced that
Chinese banking system liquidity "is
at a reasonable level", but that
banks must control liquidity risks from fast capital expansion,
especially credit expansion, according to a statement on management
of banks’ liquidity on website. The implication: no easing any time
soon, and sure enough no repo or reverse repo activity was logged in
the overnight session meaning Chinese banks, for the time being,
continue to be on their own, without any hope of the central bank
stepping in to bail them out.
The
PBOC announcement appears to have restored some stability in the
interbank market if only for a very brief amount of time: the 1 Month
SHIBOR drops 234 bps, most since Oct. 2007, 7.3550%, with the one-day
repo rate falling 204 bps to 6.6540%. Longer-term liquidity also
improved modestly, with the seven-day repo rate drops 159 bps after
sliding 237 bps on June 21. However, as Market News reported , the
PBOC won’t cut reserve ratio, interest rates in near term, and if
anything will just use more open-market operations. The problem with
this kind of opaque intervention is that it once again raises the
specter tha behind the scenes one or more banks are getting direct
bailouts. In other words, look for real interbank liquidity to be
abysmal at best.
Not
helping the PBOC's credibility was the news that China Development
Bank canceled a bond sale up to CNY20 billion planned for tomorrow
for "reasons."
Certainly
not helping China was that late on Sunday Goldman cut its China
growth forecasts for 2013 and 2014, "on the account of soft
cyclical signals and recent tightening of financial conditions. We
now expect real GDP growth to be at 7.5% yoy in Q2 2013 (from 7.8%
previously), and 7.4% and 7.7% for 2013 and 2014 respectively (from
7.8% and 8.4% previously)."
End
result: the Shanghai Composite, which had largely been able to
weather the recent dramatic shocks to both liquidity and the economy,
finally threw in the towel and crashed. Moments ago the Shanghai
Composite fell 5.5%, the biggest intraday slide since August 2009,
and dropping below 2,000 for first time since
December.
The
brodest China index is now down 14% year to date, with the Property
Index leads slump with 7.7% drop to lowest since November.
Needless
to say the world's second largest economy imploding, and its stock
market crashing were enough to send all of Asia lower, with the
Nikkei225 unable to sustain gains on a weaker Yen, and swining from
up over 1% to down 1.3%. As for that China derivative, Australia and
specifically its currency the AUD, it just hit a fresh 52 week low
against the USD at 0.9155.
Of
course, if the BIS's
warning about what is coming to
the "developed markets" is accurate, this is nothing but a
pleasant rehearsal of what one can expect in the US and in other G-7
places.
As
for China, if Goldman is correct, look for much more pain below. Here
is the summary of the firm's downgrade of the Chinese economy:
We are cutting our China growth forecasts for 2013 and 2014, on the account of soft cyclical signals and recent tightening of financial conditions. We now expect real GDP growth to be at 7.5% yoy in Q2 2013 (from 7.8% previously), and 7.4% and 7.7% for 2013 and 2014 respectively (from 7.8% and 8.4% previously).
The recent tightening of the interbank market has sent a strong policy signal that the strong credit growth earlier in the year will likely not continue. We estimate this to tighten the FCI by another 30-40 basis points (bp) in the coming months, in addition to the FCI tightening of 100 bp so far this year driven by the rapid CNY appreciation on a trade-weighted basis.
The liquidity tightening is another indication that the new government has put priorities on tackling the structural problems. These policies help to foster more sustainable medium-term growth, but will test the government’s tolerance for a cyclical downturn. A reversal of the recent tightening is the main upside risk to our new forecast. Continued DM stagnation or spreading overcapacity problems will imply downside risks.
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