Nosedive Panic

The crash in Chinese equities continues amid regulators’ talk of panic and irrational selling.

Ironically, China has banned the use of terms like ‘equity disaster’ and ‘rescue the market’ in analyst’s reports on the stock market.

Over Half of Companies Halted

The Guardian reports China Stock Markets Continue Nosedive as Regulator Warns of Panic.

Chinese stock markets tumbled again on Wednesday as investors shrugged off a series of support measures by Chinese regulators, including the central bank’s first public statement in support of the market since it cut interest rates in late June.

Minutes after opening, the Shanghai Composite Index fell by just over 8%. while the Shenzhen Component was down almost 5%.

Within ten minutes of trading, more than 1,000 shares across China’s two stock markets had dropped by the daily limited of 10% and had their shares automatically suspended. About 1,400 companies, or more than half of those listed – filed for a trading halt in an attempt to prevent further losses.

Christopher Balding, a professor of economics at Peking University said that while it was not possible to know exactly why so many companies had suspended trading, a large number were doing so because they had used their own stock as collateral for loans and they want to “lock in the value for the collateral”.

Balding said: “I don’t see it getting better. There is not going to be a turn around within the next week or two.”

“It probably has a long way to go. Margin loans basically rose much faster and they are not falling nearly as fast, margin debt is not falling nearly as fast as the market is falling. What that is telling us is that there is a lot of stock that needs to be sold that hasn’t been sold yet.”

Fresh Turmoil

The Financial Times reports Fresh Turmoil Hits China’s Stock Market.

China’s central bank stepped up state support for sinking stocks on Wednesday, as investors rushed to sell what they still could after a fresh wave of share suspensions that have now halted trading in half the market.

The renewed selling followed another round of share suspensions overnight, which have now halted trading in 1,476 stocks — or more than 50 per cent all listed companies on China’s two main exchanges. The suspensions have frozen $2.6tn worth of equity, according to Bloomberg calculations.

Beijing responded with further measures to steady the market. The People’s Bank of China said it was helping state-owned China Securities Finance Corporation access liquidity through “interbank lending, financial bond issuance, collateral finance, and re-lending”. The central bank will also continue to help the fund “hold the line against the outbreak of systemic or regional financial risk”, it said.

This is the clearest statement yet about what CSF is doing — buying shares directly using PBoC money, a big departure from its traditional role of lending to brokerages to support margin lending.

In a separate statement ahead of Wednesday’s open, the China Securities Regulatory Commission said: “Currently there is a mood of panic in the market and a large increase in the irrational dumping of shares, causing a strain of liquidity.”

In spite of the panic selling, two global investment banks sounded a bullish note on the Chinese market.

HSBC upgraded its rating on China to “neutral” from “underweight” and raised it price target for the Shanghai Composite to 4,000 points, while Goldman Sachs said it expects the CSI 300 index to rise more than a quarter from its current level over the next year.

Hong Kong Hit

Reuters reports China Stocks Slump Again, More Companies Halt Trading; Hong Kong Also Hit

The panic in mainland markets is rippling across the border, knocking the Hong Kong market down more than 4 percent. Overseas-listed Chinese companies also slumped.

On Wednesday morning, stocks fell across the board, with only 83 stocks rising and 1,439 falling.

Even Shanghai’s top four blue chip exchange-traded funds , the target of intensified purchases by a stabilization fund set up by Chinese brokerages, and state investor Central Huijin, also fell sharply.

Bank of America Merrill Lynch said China’s deleveraging and margin calls could be far from over, with no bottom seen until the government becomes buyer of last resort.

Pessimism has spread to Hong Kong, where the Hang Seng index dropped 4.2 percent, while the Hong Kong China Enterprises Index slumped 5.3 percent. 

$SSEC Shanghai Index

Irrational Selling?

Is there irrational selling? No, is the easy answer.

There was irrational margin-fueled buying, largely done by kids who did not graduate from high school.

Pent-Up Demand to Sell

Companies that purposely halted their shares because they used those shares as loan collateral are in serious trouble.

Those who want out, cannot get out. The moment people can get out, many will choose to do just that.

In halting shares, companies have made three errors

  • They decreased liquidity
  • Brought to light their own poor decisions
  • Created a pent-up demand to sell

Stupid is as Stupid Does

Using inflated share prices as collateral is about as dumb as you can get, but corporations make inane decisions all the time. Here’s two examples:

  1. GM loaded its pension fund with GM shares to support its share price right before the value of those shares went to zero.
  2. US corporations are currently borrowing money to buy back their shares at absurd prices.

Some never learn. Alternatively, they have unfounded faith the Fed will always come to their rescue no matter what idiotic things they do.

As I have pointed out, the Fed is not in control. Rather, unfounded belief the Fed is in control, is what keeps things afloat.

If the Fed was truly in control, there would not have been a dot-com collapse in 2000, a housing crash in 2007, and another bubble ready to pop right now.

Mike “Mish” Shedlock