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Commentary

China Has Gone Nuts Defending Its Stock Market

There comes a time in every country when you find the stock markets tanking and every regulator decides it’s their responsibility to bring the markets back up. This time it’s China. After their stock market fell 30% in less than a month, regulators have begun to see the fall as a huge problem. Even though they didn’t complain on the way up:

image

The fall is probably a result of way too much leverage driving the markets. Chinese investors – and they are a majority, with only 3% foreign participation in mainland indexes – borrowed up the wazoo to speculate in Chinese stocks, which took the markets up huge. At one time, there was an IPO that went up 10% limit, for every single trading day for nearly two months. That’s a whopping gazillion % return (fact: Your mind turns to jelly after about 300% in two months, this is much much more. You would be quite happy with just 30% out of that lot)

Since then, at some random point, the Chinese story stalled. Perhaps it was the lack of inclusion in the MSCI index, and perhaps it was something else. We can’t put a finger on it, but the money started to leave and started to leave really fast. Result: We’re here, at -30% in less than a month now.

Government Panic

The steps now being taken borders on panic. The Chinese Authorities have:

  • cut interest rates
  • increased the level of leverage and eased collateral requirements for margin trading so much that even real estate can be used as collateral.
  • A bunch of brokers have decided to meet and support stocks – upto $19 billion will be used to buy bluechips and they won’t sell for a year.
  • The Central Bank of China will put money into the securities regulator so that higher margins can be financed for investors. Effectively, this is equivalent to the central bank lending money to people who buy stocks with it.

Even with that, as you can see in the graph above (the last bar) the market opened up 7.5% but closed up only 2% and that too near the close.

This, apparently was tried in the 1929 during the big stock market fall, by JP Morgan and a bunch of other brokers. (Source: Zero Hedge)

China Stocks Versus Dow Average in 1929 

You can do anything with data of course, and note that the scales are different. However both times around, we saw 30% drops before such supports came by.

With the Greek issue temporarily moving to hibernation, the problem in China might just be an issue for global worry going forward. Let’s hope the rot is stemmed, but history tells us such intervention hardly ever works. And even now, China’s market is positive in 2015. There’s a long way to go!

  • DJ says:

    I was following that IPO over here:
    http://www.bloomberg.com/quote/300431:CH
    40 bagger in 40 days…
    Strangely, trading on it has been halted since June 10th and I can’t find any news about why or what happened to it since then.
    Wonder what happened to the stock…

  • Chris Mack says:

    Agree, why this is going. I am also not receiving anything further.

  • Ranga says:

    Nit-pick alert. Source says ZeroHedge, link takes to Bloomberg.
    🙂

  • kumar says:

    wrong time to talk about rationality in the chinese market, i don’t think there ever was a time, it is always either greed or fear.
    As go the people, so goes the country. they have now banned large shareholders from selling for the next six months.
    I am waiting to see what more their government does, as that is going to work as a template for future crises in other countries, and the problems are coming up fast in multiple places. Much like italy is watching to see what greece does with the euro problem, because they might have to face it next year or so.

  • kumar says:

    the stock markets and their nations should impose a ground rule that you can play in the market if you can only bid upwards on any stock. No shorts allowed, and no one is allowed to bid lower that then ask.
    and if the company goes out of business, no matter. bid on it as if it was going to come back tomorrow.
    i expect some chinese heads to [literally] roll over this debacle.