Just hours after the PBOC announced a modestly “revalued” fixing in the CNY, which curiously led to weaker trading in the onshore Yuan for most of the day before a forceful last minute intervention by the central bank pushed it back down to 6.39…
… it was the local stock market spinning plate – which had been relatively stable during the entire FX devaluation process – that China lost control over, and after 7 days of margin debt increases the Shanghai Composite plunged by 6.2% in late trade, tumbling 245 points to 3748, just 240 points above its recent trough on July 8, a closing level some 27% off its June peak. The smaller Shenzhen Composite Index fell 6.6% to 2174.42. This was the biggest single-day rout since July 27.
According to Reuters, “volatility in both indexes spiked in the afternoon in what is becoming a mysteriously recurring pattern in China’s stock markets since Beijing stepped in to avert a full-blown price crash in early summer.”
There were various reasons cited for the selling: one was that with Chinese housing data coming in stronger than expected, that Beijing may limit its future interventions to promote further easing of financial conditions and thus, supporting the market as we warned last night after the housing data came out:
Another reason cited by Bloomberg is that stocks fells on “short-selling concerns.” BBG cited Central China Securities strategist Zhang Gang who said that “investors worry about potential aggressive short-selling activities after some brokers resume short-selling transactions, and this has hurt sentiment.”
Bloomberg adds that some speculative funds exited after gains in morning on fears that short-term speculative buying of SOE concept stocks may have come to an end.
According to the WSJ, “fresh anxieties about China’s commitment to steadying the stock market sparked heavy losses in Shanghai Tuesday, despite signals of a housing recovery and the central bank’s latest steps to keep cash from fleeing.” The heavy selling in the final minutes of trading echoed sessions in recent weeks, when faltering assurances of China’s role in the market hastened losses.
“At 2 p.m. it started to turn south again at a very fast rate,” said Steve Wang, a research director at Reorient Group. “People questioned why the government hadn’t yet stepped in” at a time of the day that it usually would, he added.
One can’t help but smile at this interpretation of what the “market” has become. Some who aren’t smiling, however, are those who once again decided to lever up with margin debt – as noted above, today was the 7th daily increase in retail investor leverage – only to lose all of it again just as we warned would happen yesterday. And now even the official party mouthpiece is starting to issue snarky announcements.
Losses among stocks of state-owned enterprises in Shanghai started building earlier in the morning amid skepticism about Beijing’s commitment to reform. Reports of efforts to accelerate reform, long touted as a way to open up bulky conglomerates to private investment and market forces, had gained momentum in recent weeks and buoyed related stocks.
The final damage: a total of 58% of stocks listed in Shanghai hit their downward daily limit of 10%, while 52% of all Shenzhen-listed shares met the same barrier, according to FactSet.
Here is a case study of what a government takeover of the stock market gone wrong looks like:
Take Guangdong Meiyan Jixiang Hydropower Co.: The state-run firm tasked to prop up the market, China Securities Finance Corp., is the biggest shareholder in the hydropower firm as of August 4, according to a company filing. CSF Corp.’s hefty role makes the company a “signature stock,” said Deng Wenyuan, an analyst at SooChow Securities.
When its shares fell by their 10% limit on Tuesday, it “may have sparked investors to resort to panic selling,” he said. The company’s shares had surged 150% as of Monday, 10 days after the stakeholder announcement.
Stocks that would benefit from reform of state-owned enterprises and those favored by CSF Corp. had been a driving force behind market rally since the June rout. “Both engines lost power today,” Mr. Deng added.
