Chinese Stocks Suffer Second Biggest Crash In History, 1,500 Companies Halted Limit Down
27 July, 2015
This was not supposed to happen.
After pledging, investing and otherwise guaranteeing the Chinese stock market to the tune of 10% of GDP, and intervening on at least 40 different occasions in the past month ever since China's stock bubble burst in late June, with the subsequent crash nearly taking the Shanghai Composite red for the year, overnight China officially lost control for the second time, when after a weak start to the Monday trading session, things turned very ugly in the last hour, when the Shanghai Composite plunged by 8.48%, closing nearly at the lows, and tumbling some 345 points for its biggest one-day drop since February 2007 and its second biggest crash in history!
The selling was steady throughout the day, but spiked in the last hour on concerns China would rein in its market-supporting programs following IMF demands to normalize its relentless market intervention. According to Bloomberg's Richard Breslow: "fear that the extraordinary support measures employed to hold up the market may be scaled back caused heavy afternoon selling resulting in a down 8.5% day." Of course, one can come up with any number of theories to explain the plunge: for example the PBOC did not buy enough to offset the relentless selling.
The last thing the communist party and the PBOC wanted was another massive sell off after having not only fired the "bazooka" but come up with a different bazooka to halt "malicious sellers" virtually every day, including threats of arrest.
Nobody was spared in the selloff and of the 1,114 stocks in the Shanghai Composite, 13 closed higher on Monday.
Here, courtesy of the WSJ, are some of the more amazing numbers of today's selloff:
- The Shanghai Composite Index ended down 8.5% at 3725.56, its second-straight day of losses and worst daily percentage fall since February 27, 2007. The smaller Shenzhen Composite fell 7% to 2160.09 and the ChiNext, composed of small-cap stocks and sometimes known as China’s Nasdaq, closed 7.4% lower at 2683.45.
- More than two-thirds of the stocks in the Shanghai Composite, or about 765 companies, hit their down limit on Monday. Those limits prevented hundreds of stocks from logging sharper declines, though they can also make it harder for investors to exit positions.
- Since the Shanghai Composite peaked in June, it has lost 28% of its
value. Massive intervention by authorities in Beijing engineered a
rebound for the country’s stock markets earlier this month, but Monday’s
selloff eroded much of that recovery.
- Although hundreds of stocks have resumed trading since the market bottomed earlier this month,126 stocks on the Shanghai Composite are still halted.
- International investors have been ditching Chinese stocks for the past few weeks, spooked by widespread share suspensions that locked up capital. Investors sold stocks during 13 of the past 16 trading sessions via the Shanghai-Hong Kong Stock Connect, a trading link connecting the two cities that launched in November. Cumulative outflows now total 39.9 billion yuan, or U.S. $6.43 billion.
According to Reuters, there was little to explain the scale of the sell-off. Some analysts said fears that China may hold off from further loosening of monetary policy had contributed to souring investor sentiment.
Sure enough, narratives to "explain" the selling which beget more selling, were promptly offered, as can be seen in this Bloomberg summary of aftter the fact research reports;
- “The decline, extending losses on Friday, is a technical correction after hundreds of companies rebounded 50% with dozens of stocks even doubling after the sell-off,” analyst Shen Zhengyang says by phone
- “The rebound from the earlier sell-off has pretty much come to an end and the market needs to take a breather”
- Possible expansion of yuan band may put the currency under depreciation pressure, while pick-up in home prices in 1st- tier cities may mean weaker-than-expected monetary easing policies going forward
- Mkt might enter range-bound consolidation after technical correction, but upside will be limited as investor confidence was shattered in earlier sell-off
CHINA SOUTHERN FUND
- Mkt slumps due to “fragile” investment sentiment, investors locking in profit from previous rebound: chief strategist Yang Delong says in phone interview
- A shares extend decline as investors started to take profit from last Friday after recent mkt rebound
- Investors lose faith in a longer-term rebound
- Expects China to roll out more measures to boost A shrs if SHCOMP drops below 3,800
- Govt backed funds, with big enough war chest, may buy stocks after mkt slump today
SHENWAN HONGYUAN GROUP
- Pullback today mainly due to profit-taking, while news on possible govt exit of mkt rescue also has impact on mkt: analyst Qian Qimin
- Weakness in heavyweight stks may lead to “double dip” in mkt, sees “policy bottom” at 3,500 points as index below that level may trigger panic again
- Fundamentals underpinning bull mkt may have disappeared given low probability in further monetary easing, potential investment shifting to property mkt, more cautious mkt sentiment
- A share slump today is an “aftershock” as mkt sentiment needs longer time to recover from previous mkt correction: analyst Huang Cendong
We agree with one thing: having gone all in, the Chinese government can't stop now, and after pledging half a trillion for its Plunge Protection Team (recall China skipped all the QE pleasantries and proceeded straight to buying stocks, launching a quasi-nationalization of the market and making the China Securities Finance Corp a Top 10 shareholder of numerous stocks), it will be forced to do even more, in the process crushing confidence that much more, since investors both offshore and domestic, realize that the fair value of stocks is far lower than current price ex. government intervention.
"Investors are not confident that the bull market will return any time soon," Jimmy Zuo, a trader at Guosen Securities, told Bloomberg.
"People want to pocket profits after the benchmark index rose past the 4,000 mark."
And who can blame them? The only question we have is when will people in other "developed" markets wake up to their own just as manipulated markets, and decide they too have had enough with the rigged casino.
Actually, there is another question: the last time Chinese stocks had a near-record crash, the PBOC somehow "discovered" 600 tons of gold hiding under the couch to prop up confidence. We wonder how much it will "discover" this time.
From the South China Morning Post
From the South China Morning Post
China’s support measures crumble as Shanghai stocks dive 8.5 per cent in biggest daily drop for 8 years
Government action to prop up stocks buckles under selling pressure as the Shanghai index suffers biggest one-day fall in eight years
Investors and savers hit as FTSE 100's gains for 2015 are wiped out
The UK's benchmark index fell as much as 1.2pc, wiping out gains so far this year
27 July, 2015
Gains made on Britain’s benchmark index so far this year have been wiped out after the FTSE 100 fell as much as 1.2pc in afternoon trade.
Oil slump leads to $200bn cut in new energy projects - study
27 July, 2015
The world’s top energy firms have put off $200 billion in spending on 46 major oil and gas projects due to the oil price slump, according to energy consultancy Wood Mackenzie. This is in reaction to the oil price dropping, with it now at to 4-month low.
#BlogAlert: Pre-FID project deferrals: 20 billion boe and countinghttp://t.co/ThQZJisne6#oilprice#energy#Upstreampic.twitter.com/NG3DJOPDNc
— Wood Mackenzie (@WoodMackenzie) July 27, 2015
China’s Record Dumping Of US Treasuries Leaves Goldman Speechless
Looking at China more specifically, it appears that, after adjusting for currency changes, Chinese FX reserves were depleted for a fourth straight quarter by around $50bn in Q2. The cumulative reserve depletion between Q3 2014 and Q2 2015 is $160bn after adjusting for currency changes. At the same time, a current account surplus in Q2 combined with a drawdown in reserves suggests that capital outflows from China continued for the fifth straight quarter. Assuming a current account surplus in Q2 of around $92bn, i.e. $16bn higher than in Q1 due to higher merchandise trade surplus, we estimate that around $142bn of capital left China in Q2, similar to the previous quarter.
This brings the cumulative capital outflow over the past five quarters to $520bn. Again, we approximate capital flow from the change in FX reserves minus the current account balance for each previous quarter to arrive at this estimate (Figure 2).
One way that slower EM capital flows and credit creation affect the rest of the world is via trade and trade finance. Trade finance datasets are unfortunately not homogeneous and different measures capture different aspects of trade finance activity. Reuters data on trade finance only aggregates loan syndication deals, which have mandated lead arrangers and thus capture the trends in the large-scale trade lending business, rather than providing an all-inclusive loans database. Perhaps the largest source of regularly collected and methodologically consistent data on trade finance is credit insurers (see “Testing the Trade Credit and Trade Link: Evidence from Data on Export Credit Insurance”, Auboin and Engemann, 2013). The Berne Union, the international trade association for credit and investment insurers with 79 members, includes the world’s largest private credit insurers and public export credit agencies. The volume of trade credit insured by members of the Berne Union covered more than 10% of international trade in 2012. The Berne Union provides data on insured trade credit, for both short-term (ST) and medium- and long-term transactions (MLT). Short-term trade credit insurance accounts for the vast majority at around 90% of new business in line with IMF estimates that the vast majority 80%-90% of trade credit is short term.
Figure 4 shows both the Reuters (quarterly) and the Berne Union (annual) data on trade finance loan syndication and trade credit insurance volumes, respectively. The quarterly Reuters data showed a clear deceleration this year from the very high levels seen at the end of last year. Looking at the first two quarters of the year, Reuters volumes were down by 25% vs. the 2014 average (Figure 4).The more comprehensive Berne Union annual volumes are only available annually and the last observation is for 2014. These data showed a very benign trade finance picture up until the end of 2014. Trade finance volumes had been trending up since 2010 at an annual pace of 8.8% per annum (between 2010 and 2014) which is faster than global nominal GDP growth of 6% per annum, i.e. the trend in trade finance had been rather healthy up until 2014, but there are indications of material slowing this year. This is also reflected in world trade volumes which have also decelerated this year vs. strong growth in previous years (Figure 5).
China’s balance of payments has been undergoing important changes in recent quarters. The trade surplus has grown far above previous norms, running around $260bn in the first half of this year, compared with about $100bn during the same period last year and roughly $75bn on average during the previous seven years. Ordinarily, these kinds of numbers would see very rapid reserve accumulation, but this is not the case. Partly that is because China’s services balance has swung into meaningful deficit, so that the current account is quite a bit lower than the headline numbers from trade in goods would suggest. But the more important reason is that capital outflows have become very sizeable and now eclipse anything seen in the recent past. Headline FX reserves in the second quarter fell $36bn, from $3,730bn at end-March to $3,694bn at end-June. While we estimate that there was a large negative valuation effect in Q1 (due to the drop in EUR/$ on the ECB’s QE announcement), there was likely a positive valuation effect in Q2, which we put around $48bn. That means that our proxy for reserve accumulation in the second quarter is around -$85bn, i.e. the actual “flow” drop in reserves was bigger than the headline numbers suggest because of a flattering valuation effect. If we put that number together with the trade surplus in Q2 of $140bn, net capital outflows could be around -$224bn in the quarter, meaningfully up from the first quarter. There are caveats to this calculation, of course. There is obviously the services deficit that we mention above, which will tend to make this estimate less dramatic. It is also possible that our estimate for valuation effects is wrong. Indeed, there is some indication that valuation-related losses in Q1 were not nearly as large as implied by our calculations. But even if we adjust for these factors, net capital outflows might conceivably have run around -$200bn, an acceleration from Q1 and beyond anything seen historically.
The big question is obviously what is driving these flows and how long they are likely to continue. We continue to take the view that a stock adjustment is at work, although it is clear that the turning point is yet to come. We will look at this in one of our next FX Views. In the interim, we think an easier question is what this means for G10 FX. This is because this shift in China’s balance of payments is sure to depress reserve accumulation across EM as a whole, such that reserve recycling – a factor associated with Euro strength in the past – is unlikely to be sizeable for quite some time.