China Syndrome Burns Stocks, Commodities

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

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  11 comments for “China Syndrome Burns Stocks, Commodities

  1. NotSoSure
    Jul 8, 2015 at 1:42 pm

    My most conservative Chinese short has gone up at least 5 percent a day over the last 2 days. Happy days around the corner.

    • Jul 8, 2015 at 3:04 pm

      Watch out for the snap-back rally and the ensuing whiplash. Shorting is way too painful for me these days….

      • buzz
        Jul 9, 2015 at 5:02 am

        Painful? Painful is when the Chinese Gov threatens to jail and kill short sellers for violating the so called rules for imploding the market that they created aka the Chinese Gov. Was up 5.8 at the close last night

  2. Vespa P200E
    Jul 8, 2015 at 1:47 pm

    Let’s see here… Commie cadres panicking, overreacting and heavy handed interceding to ah so decadent capitalist stock market? Gee what can go wrong? Call up the Chinese socialist fire brigade of course for good ol Chinese fire drills?

    Things must be pretty bad for the commies to step in and loosen (more like ignore) the margin call rules, lock up bulk of the shares from being traded with sellers frozen out of 71% of Market (yep that will do it – LOL), command the brokerages to buy and HOLD 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.

  3. Petunia
    Jul 8, 2015 at 1:58 pm

    AIG went no bid on the NYSE and they call it a technical glitch, sure.

  4. Jul 8, 2015 at 2:21 pm

    China’s pretty screwed alright. No government can hold up a stock market forever, and I don’t think the Chinese gov can either. This is a bubble that’s deflating at 100mph.

    • Vespa P200E
      Jul 8, 2015 at 3:26 pm

      It’s like little Dutch (Chinese) boy with a finger on a leaky dyke who saved Holland (China). Well it will last as long as BOC printing more RMB or issue mother of all QE (buy shares instead of debts). Next up is housing market bubble as when one is tapped out of liquidity thanks to locked up shares and lots of people’s money is tied up in the market then…

      Wait haven’t we seen this movie before back in 1989 when Japan’s stock and RE markets collapsed?

  5. Michael Gorback
    Jul 8, 2015 at 2:30 pm

    Good luck with those shorts. If the stock isn’t trading you can’t close your position.

    There’s a double whammy with the commodities because a lot of collateral that has been posted for loans has been in the form of warehouse receipts. Not only has the value of the collateral fallen, but a lot of those warehouses have been Corzine’d, i.e., the contents have been rehypothecated elsewhere as collateral for other loans.

    Publicly traded companies have posted shares as collateral for loans and those values have fallen. Given the numerous stocks where trading has been halted the lender can’t even liquidate your position.

    Worthless empty condos in ghost towns have been used for collateral for margin loans. Good luck liquidating those.

    It’s one thing when your leverage blows up. It’s quite another when the collateral you promised your counterparty takes them down too.

  6. MC
    Jul 8, 2015 at 4:06 pm

    I completely liquidated my Chinese financial position on the 8th of June. Lucky? Surely. But I had been investing in Chinese stocks ever since it was possible for foreigners and what had been going on since April had literally scared the living Hell out of me.
    Shanghai was out of control, but Shenzen was in a parallel universe as far as sheer madness was concerned. IPO’s could give you a 70+% return in a week… and still it wasn’t enough.

    I kept an eye out on the number of trading licenses opened and it quickly dawned to me this was another case of central planning gone mad. For whatever reason, the Chinese Communist Party had decided to push ordinary citizens into stocks. In typical Chinese fashion, this was done without a second thought being given about long term consequences and on the largest scale possible.

    When the dust will settle (watch out for snap rallies followed by more repricing that will wipe out a lot of people), lots of people will be left with their savings decimated and some leveraging to boot. With the rest of their bloated and unsustainable economy unwinding, Beijing will have to come up with something, anything, to keep on purchasing social peace.

    A coda to this ridiculous fiasco is this week Chinese investors are selling anything that isn’t nailed down to get cash: Beijing-traded commodities are getting slaughtered as people scramble to get liquidity… I wonder if we are about to see a wave of selling on the foreign housing markets so favored by Chinese buyers. Better sell now before those egregious housing bubbles start popping one after another…

    Closely related is how European and American markets at the moment seem unconcerned with reality as usual and have their eyes set on Greece.

    Brazil ripping at the seams, China is in turmoil, commodities are heading back to where they belong after the recent unsustainable mini-rally, unemployment in Europe remains beyond atrocious… yet all that matters is a farce that has been going on for far too long and whose outcome short term is a given: more can kicking.

  7. d
    Jul 9, 2015 at 4:39 am

    Today somebody named it a “Potemkin market”.

    Considering over 50% of the stocks are on extended trading halt.

    Shareholders with over 5% stake in any 1 entity amy not sell any of it for six months.

    Brokerages have been instructed to “Invest” billions and are forbidden to sell the holdings untill the market passes 4500.

    Pension funds are being instructed to buy.

    The PBOC is also directly buying and instructing other state entity’s to buy.

    “Potemkin market” would be extremely complementary. IMHO.

    Yet these people expect us to use CNY as a reserve currency. NOW Westerners, NOW.

    Perhaps after a millennium or so has passed, without any of the types of manipulation listed above. The rest of the planet may need to consider it.

  8. randombypasser
    Jul 9, 2015 at 1:48 pm

    Anyone placing a bet in any kind of a game should be mentally prepared to lose the bet totally and then some, if been sloppy. That’s the basic reality and it should be the first to thing realize, and accept, before placing the bet.
    And the so called “investing” in stocks, indices, futures, You name it, is actually nothing more than one kind of a gambling. You placed the bet, for whatever reasons and rationalizations, and there You have it, good luck.

    To think about the Chinese markets, we’re still nicely on two digit profit looking a year back so what’s the huss and fuss? You came in February with blind haste, wanted quick money for nothing? Sorry, the breakfast service is over now, come back tomorrow.

    But You were “investing”… How can this happen? What where you investing for, beg Your pardon? You were gambling, just for You, for Your future money, hopefully only with only Your current money which You could lose, barely though.

    You placed Your savings on Chinese stocks and got burned? You called it investing? No way, You just gambled on a laser hot racetrack. But You just got a important lesson, digest it well.

    In my books investing is something productive in which You give Your part, maybe some money for example. That way You give part of Yours to achieve something more with others than You could achieve alone. And that something would benefit You and the others, in ways, maybe in real money. That’s investing.

    To place Your part for something where You can only win if someone else is losing, or vice versa, is not investing. It’s gambling, face the truth, nice or not.
    If, for example, every time someone buys company X’s stocks from the public markets the company itself would get small commission of the deal, that would benefit the company and others that have placed their part to that company and in the long run the buyer him/her/it self too. That could be called investing.

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