It was an ugly open for the Shanghai Stock Exchange on Wednesday. Within minutes, the index plunged 8%. Only three stocks were in the green. Over 1,300 stocks hit the 10% down limit and stopped trading. Margin bets imploded. Then the People’s Bank of China pulled out its megaphone to reaffirm its capital support.
It helped. By the end of the day, the SSE was down “only” 5.9%. Since its peak on June 12, it has plummeted 32%. The government-sponsored dream that highly leveraged bets in stocks are a way to get rich quick for everyone – a capitalist entitlement in a communist country – has popped.
The Shenzhen stock exchange, where smaller and medium-sized companies trade, dropped 2.5% for the day, down 40% since June 12. ChiNext, home for tech companies and startups, edged up 0.5% for the day, after having plummeted 41% since early June. More on that phenomenon in a minute.
Hong Kong’s Hang Seng index plunged 5.8%, its worst single-day dive since the Financial Crisis. It’s down 18% since late April.
People that have been lured into the trap have lost their savings with leveraged bets. Some of them had planned to invest the quick stock-market gains in the real economy by buying a home. That dream too has popped. And they’re getting angry.
But the government is taking measures…. George Chen, Managing Editor at the South China Morning Post’s International Edition, reported that according to Chinese media sources, the government has ordered the media “not to report stock market related protests, especially recently in major cities like Shanghai and Beijing.”
Last weekend, the government had ordered the media not to publish negative comments on the stock market.
Many of the remaining efforts by government to halt the implosion of the stock market bubble and turn it around are based on three principles: have government-owned or controlled entities buy stocks or ETFs; stop diverting capital from listed stocks by suspending IPOs; and fund stock purchases in an already over-leveraged market by making it easier to borrow money that the PBOC would make available in unlimited quantities.
But on Wednesday, confusion set it. In prior sessions, shares of smaller companies had gotten decimated. No one wanted to touch them. But some of the largest state-owned companies rose sharply, after buying had set in upon government orders. This reversed on Wednesday. Shares of small and medium-sized companies survived in much better shape than large caps: Shanghai, home of large-caps, was down 5.9%; Shenzhen was down only 2.5%; and ChiNext actually rose 0.5%.
Turns out, the China Securities Regulatory Commission (CSRC) had ordered its margin finance agency to buy more mid- and small-cap stocks, rather than just blue chips as per prior orders, Chen reported. Word spread. Small-caps stopped plunging. It’s in these smaller stocks where many regular folks had been losing their shirts. And these regular folks were getting restless.
But now the large caps couldn’t stand upright on their own. China’s biggest exchange-traded fund, the China 50 ETF, which buys into shares of the 50 largest companies listed in Shanghai, had jumped on Monday and had survived Tuesday undamaged, as upon government orders the big players bought the most liquid companies, and the most liquid companies bought their owns stocks.
But on Wednesday, it got whacked, hitting its 10% down limit in the afternoon, before recovering a little to close down 6.7%. The somewhat broader China 180 ETF, after also hitting its 10% down limit Wednesday afternoon, ended the day down 7.2%. Dismal!
As the government tries to prop up the left side, the right side collapses. Then it tries to prop up the right side, and the left side re-collapses…. A panicky whack-a-mole.
It spread from there. The Korean KOSPI stock index fell 1.2%. The Indian Sensex dropped 1.7%. The Japanese Nikkei, which has been heavily supported at every dip by the Bank of Japan’s QQE program, dropped 3.1%.
And worries about demand in China have demolished commodities.
Oil has re-plunged. China is the largest oil importer in the world. And the largest producers are battling each other over market share by ratcheting up production. West Texas Intermediate, as I’m writing this, it’s down 2% for the day. Since June 24, when the selloff in Chinese stocks was transitioning into a crash, WTI has dropped over $10 a barrel, or over 16% [read… Oil Falls Off the Chart, Crushes Hopes].
The China syndrome is sinking metals too. Copper is considered an indicator for global demand. China, the globe’s largest metals consumer, accounts for 47% of copper demand. And in China, growth has stalled. So yesterday, copper dropped to the lowest level since the Financial Crisis, though it has ticked up since.
Other metals followed. The London Metals Exchange gauge of six metals – copper, aluminum, nickel, lead, tin, and zinc – dropped 4% yesterday to the lowest since July 2009, before picking up some.
“We simply just don’t know where these events in China are going to take us,” Nicholas Snowdon, an analyst at Standard Chartered in London, told Bloomberg. “The concern is that it’s going to ultimately feed through to the real economy, with a negative impact on metals demand.”
European stocks were spared today, after days of relentless selloffs. They’re hung up on the latest sound bite about Greece’s fate, and today hope reigns. Or perhaps it was just an overdue bounce. The German DAX rose 0.7%, after days in the red. It’s down 13% from its peak in April, after having soared nearly 50% in the prior six months, inflated by the ECB’s big QE program, whose effectiveness in propping up financial markets appears to have reached its limits.
US stocks aren’t so lucky, for the moment. OK, the NYSE is broken, and trading is halted on it. “Technical issues” are blamed. It’s been over two hours. Uncertainty reigns. But the other exchanges are working, and indices are dropping, with the Dow, the S&P 500, and the Nasdaq all down over 1%. But dip-buying is expected to set in soon….
This might be a preview of what happens in an environment where years of easy-money policies have inflated nearly all assets. Now that they’re all overpriced, and teetering at precarious levels, it doesn’t take much to push them off their perch.
And hope took a hit from fickle, strung-out consumers. Read… The Chilling Thing Gartner Just Said About a Once Hot Engine of Global Growth