Chinese Stocks Come Totally Unglued

The Shanghai Stock Exchange closed down 1.3% on Tuesday, which seemed benign after its three-week, near-30% crash that saw $3.2 trillion go up in smoke. It calmed the nerves in the West; a further collapse has been averted by astute government and central bank action.

But the index was down only 1.3% because government entities, government controlled institutions, mutual funds, 21 of the largest brokerages, pension funds, the largest companies themselves, and whoever else has to follow government wishes had been buying shares of the largest companies, such as state-controlled oil companies and banks. Buying kicked in seriously toward the end of the trading day after the index had been down 4.3% earlier. With their large weight in the index, these gainers propped up the overall index. But beneath the surface, it was brutal.

The Shenzhen Stock Exchange index, where smaller and medium-size companies are traded, plunged 5.3%; the ChiNext index, where tech companies and small caps are concentrated, plummeted 5.7%.

Countless stocks hit their 10% down limit for the day. George Chen, Managing Editor at the South China Morning Post’s International Edition, reported that trading in 942 stocks, one-third of the A-share listed companies on the Shanghai and Shenzhen Stock Exchanges, had been suspended by the end of the day to shield these shares from further collapse.

Now the Chinese media are in a fix. They’d been ordered over the weekend to write only positive comments about equity markets. But on Tuesday, with the selloff continuing in all but the largest listed shares, confusion set in that George Chen at the SCMP captured with this tweet:

“State media sources: as stocks keep falling, now we don’t know how to write next editorial. Xinhua’s defended bull market since slump. Next?”

Here’s what was next: The World Bank has removed from its report on the Chinese economy a section that had lambasted China’s “wasteful investment, over-indebtedness, and a weakly regulated shadow-banking system.”

In addition, according to the SCMP, the section had criticized the state for controlling a majority of commercial bank assets and had offered some other nuggets:

“Financial reform will only prove effective if it removes the distorted incentives and poor governance structures that have affected how financial resources are mobilized and allocated.”

“As now seen, a fundamentally reconfigured role of the state in the financial system is essential to change these incentives and structures.”

If these issues aren’t addressed, they could end China’s “three decades of stellar performance.”

The section has been removed because, as the report now says, “it had not gone through the World Bank’s usual internal review and clearance procedures.”

For days, Chinese authorities have jumped through hoops and held emergency meetings to order entities they control or influence to be enthusiastic about this grisly market, buy stocks, and abstain from selling stocks. More money was made available so that investors could increase their leverage and buy even more stocks on margin. Over two dozen IPOs were suspended to prevent diversion of capital from the listed shares. And the People’s Bank of China promised to back the magic with unlimited funds.

But nothing helped.

The stock market has soared over the past year despite weak economic fundamentals and deep problems for Chinese companies. The issue now is that the crash is making weak fundamentals even weaker. The market has lured tens of millions of consumers into buying stocks with borrowed money, encouraged too by the government as a way to get rich, and these folks are now going through the arduous process of getting fleeced.

Anger among these small investors is spreading on the Internet, with one campaign that has gone viral urging the government to halt the stock market altogether to prevent further losses.

Chinese stocks were hyped in the US over the past year. Hedge funds poured into the market. China showed up in the recommended asset allocations. And so Americans bought mutual funds and ETFs of Chinese stocks, and all this foreign money helped push up the market. But now, Bloomberg reports, this money is draining out “at a record pace,”

Sales of mainland shares through the Shanghai-Hong Kong exchange link swelled to an all-time high on Monday, while dual-listed shares in Hong Kong fell by the most since at least 2006 versus mainland counterparts. Options traders in the U.S. are paying near-record prices for insurance against further losses after Chinese stocks on American bourses posted their biggest one-day plunge since 2011.

For now, the government is able to successfully lean on large companies, mutual funds, and pension funds that are either controlled by the government or depend on the government to buy stocks, including their own stocks. But it has no such luck so far with the tens of millions of panicked small investors, many of whom have already been wiped out, and with foreign investors. And it appears, no one, not even government entities, want to touch the biggest highfliers of yore.

So is the Chinese government worried about popular upheaval? Read…. Panicked Chinese Government Imposes Desperate Measures to “Aggressively” Rescue a Lot More Than Just Crashing Stocks

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  17 comments for “Chinese Stocks Come Totally Unglued

  1. NY Geezer says:

    “. . .one-third of the A-share listed companies on the Shanghai and Shenzhen Stock Exchanges, had been suspended by the end of the day to shield these shares from further collapse.”

    Wolf, “unglued” may be a euphemism for what is happening in China.

    The term “suspension” in reference to stock trading is not necessarily a short period of time. Under SEC’s rules it can suspend trading for up to 10 days. But in China there may be no end date for the suspension period under the conditions now prevailing.

    No wonder Chinese “investors” (speculators) are in a panic. I’m sure many who have stocks that are among the 2/3 that can still be traded are very nervous also. Just because trading in those stocks has not been suspended there is no reason to be complacent. It may be only a matter of a very sort time until trading in several of those stocks is also suspended.

    Meanwhile, what is the market value of a trading suspended stock? Is it the last closing price? Is it “0”? A lot of people are going to remain in a panic state for an extended time period and many who are not yet panicked will be.

  2. NotSoSure says:

    One of my better investments. I am up 20% shorting the Chinese market. My new trading model: follow Bill Gross tweet. Don’t invest in his fund, but do follow his tweet.

    • Vespa P200E says:

      Yep – FXP China ultrashort ETF? It jumped from 31 to 38 in 2 days as boy Chinese shares even the bluest of chips are under fire!

  3. JAZZ says:

    Silver lining? The recent Chinese economic and investment bubbles, so troubling to most thoughtful observers, will so be but a memory if things continue at this rate.

    And as for civil unrest, don’t sell the PRA short = no way.

  4. Mickey says:

    China closed down -1.26% July 7, but the surrogate ETF in the U.S. (ASHR) was down -7.11% as of 3:00pm July 7!

  5. Michael Gorback says:

    This is a use of the term “beneath the surface” with which I’m unfamiliar. It’s more like skywriting.

    • Michael Gorback says:

      P.S. The Chinese government needs to order all publicly traded companies to buy back stock while providing ample cheap easy credit.

      Because debt-fueled stock buybacks at record high prices has worked so well in the US. For now.

    • Wolf Richter says:

      OK, fixed it.

  6. Vespa P200E says:

    Chinese fire drill at its worst…

    Things must be pretty bad for the commies to step in and loosen (more like ignore) the margin call rules, command the brokerages to buy shares and pensions told not to sell shares. Yep more dumb socialist interventions to delay the inevitable and commie’s worst nightmare – social unrests as many Chinese empires were overcome by “peasant” uprisings.

  7. Teddi says:

    China essentially built their GDP up with Keynesian spending. Look no further than the ghost cities as an example to understand its failed policy.

    Keynesian kills…

  8. Mike R. says:

    Wonder if the US (CIA) had any hand in this downturn?

  9. Uncle Frank says:

    Now here’s how to talk the market up…

    Goldman Sachs Says There’s No China Stock Bubble, Sees 27% Rally

  10. Julian the Apostate says:

    One hardly needs the CIA to knock over a market held together with baling wire, twine, and 500 mile tape. B-)

  11. Mickey says:

    Best approach might be for China’s government to ban “gravity” and thus stocks will continue to levitate!! “All fixed!”

  12. rick says:

    How much different is the US ?
    Maybe less clumsy but it’s obvious to me the Fed bases it’s interest rate decisions on the reactions of the market.
    If the market were to free fall I have no doubt they would be in there buying with both hands to stem the tide.
    We haven’t had a real correction in some time. That might be by controlled design.

  13. Looks like China is living its ‘1929 moment’. Stocks fluctuate,

  14. This is just a classic bubble that’s bursting. CHina’s stock market went parabolic, and now it’s deflating at an even more rapid rate. Historically speaking, all bubbles end up where they started.

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