China Equities Crash Accelerating Despite Protections

July 8, 2015

Despite plunge protection measures and intervention by the Peoples’ Bank of China, mainland equity indexes continue selling off, and the crash is accelerating. The Shanghai Composite Index has plummeted 32% from a 12 June top and the Shenzhen Composite Index has slid 41%. Yesterday (Tueday 7 July), the Shanghai Composite Index fell by a record 8.5%. Where will it end and what does it mean for the global economy?

“World Equity Gauge”

By noon (UTC) today, 1,323 companies’ shares have halted trading on Chinese exchanges. The total value amounts to $2.6 trillion of shares – 40 percent of the Chinese share market’s capitalization, reports Bloomberg. 710 shares dropped by the 10%/day limit by noon, thereby, halting further selling in these shares.

Despite suspensions and other measures more than $3.5 trillion has been wiped from mainland China’s equities market since mid-June. With the use of leverage blatantly encouraged by brokers, Chinese traders are facing margin calls, especially after the Shanghai Composite index fell by a record 8.5% on Tuesday.

Du Changchun, an analyst at Northeast Securities told Yahoo Finance:

I’ve never seen this kind of slump before. I don’t think anyone has. Liquidity is totally depleted. Originally, many wanted to hold blue chips. But since so many small caps are suspended from trading, the only way to reduce risk exposure is to sell blue chips.

Enter Central Bank

The failure of official efforts to stem the sell-off has now changed the game plan to psychological tactics in order to restore investors’ and traders’ confidence. The China Securities Finance Corporation, regulator and manager of the nation’s margin trading and short selling industry, said it required at least 500 billion yuan ($80.5 billion) to barricade the equities market.

As reported in CCN.LA’s Global Economic Outlook on Monday, the amount was immediately forthcoming – from none other than the Peoples’ Bank of China, who is, by implication, financing China’s margin lending businesses as a means of protecting the domestic economy.

The Shanghai Composite Index has plummeted 32% from a 12 June top and the Shenzhen Composite Index has slid 41%.

Balance of outstanding margin debt on the Shanghai Composite Index fell by a record 93.5 billion CNY yesterday, and foreign investors sold 28.4 billion CNY worth of equities this week.

What Does It Mean?

Effectively, investors and traders who want to sell Chinese shares are locked out of 71% of the market, by the restrictions that aim to curb selling. They have to resubmit their sell orders at market open, each day, and hope that their orders are executed before the plunge-protection limits are exceeded.

Between 1929 and 1932 the Dow Jones Industrial Index lost (a Fibonacci) 89% of its value. China will be lucky to get away with 62% wiped off the Shanghai Composite, which until recently was enthusiastically dubbed the “World equity gauge”. It may well turn out to be an accurate description, since many equity indices have spent years in QE-fuelled advance and could soon – and unexpectedly – follow the Shanghai Composite in both direction and reaction.

Bitcoin is currently trading near $265 and 1670 CNY following a rally that began, in early June, from a support floor near $220 and 1375 CNY.

The Japanese Yen (right), a traditional safe haven currency is seeing large inflows amid fears of global economic turmoil being exaccerbated by Greece and China.

Debate Over A Hard Or Soft Landing for China May Be Over

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The writer trades Bitcoin. Trade and Investment is risky and subject to probability and market changes. CCN.LA accepts no liability for losses incurred as a result of anything written in this report.

Shanghai Composite chart from TradingView
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Last modified (UTC): July 8, 2015 14:32

Tags: China
Venzen Khaosan @venzen

Market analyst and Open source developer with a keen interest in blockchain technology, consensus mechanisms and the decentralizing effect. He has found a solution to the PKI mechanism. Email me to discuss.