China’s Shanghai Composite Index crashed through support on Monday and resumed decline as investors could not sell Chinese company stocks fast enough.

Deja Vu

CNBC eloquently reports that, following three weeks of relative stability in mainland markets, Monday saw the Shanghai Composite Index resume decline in its worst one-day drop in eight years. Readers will know that “eight years” marks the first round of sell-offs heading into the 2008 “Credit Crunch”.

Significantly, the index sliced through the psychological 4000 support level without pause as paniced investors rushed for the exit.

Market Psychology

CCN.LA partner presented analysis in early July illustrating that the Shanghai Composite Index crash was incomplete, both technically and psychologically, and that decline would resume. Today, we extend that analysis:


The “surprise” continuation of the sell-off, yesterday, follows a period of apparent advance during which Chinese officials boasted that they had “stopped the crash” with “timely measures”. The phenomenon is described by Elliott wave analysts as a B-wave – an apparent bounce after a declining wave A – during which the dominant market psychology is a mixture of delusion and denial. During this slow advancing B-wave investors and finance captains believe that the decline had halted – unaware, in their relief, that the worst part of the decline is yet to unfold.

Foreign investors have unloaded about $7.6 billion of Shanghai shares through the city’s Hong Kong exchange link since July 6.

State Sponsored Company Stocks Too

State-run PetroChina Company, a favorite equity holding of state-linked funds, and a blue chip stock that held strong during the down-days in June, fell 9.6% on Monday. Another government fund favorite, the China 50 ETF, sank 9.1 percent.


Chinese fund managers are hopeful (do they have a choice?) that policy makers have additional measures to support markets. Yang Delong, chief strategist at China Southern Fund Management told Bloomberg that “state-linked firms will probably start buying when the Shanghai Composite falls below 3,800.” The Shanghai composite closed at 3,725.

Chinese officials have already implemented measures that ban major shareholders from selling stocks and encourage government-owned companies to increase equity holdings. As CCN.LA reported on 8 July the Peoples’ Bank of China had funded the China Securities Finance Corp. with 480bil Yuan to facilitate leveraged margin buying via Chinese stock brokerages.

Symptoms Of Excess Credit

China has thrown everything including the kitchen sink at the equities crash, and it has yet to unfold the most destructive wave of decline. What seems to elude officials and central bankers each time a major market crash unfolds is that the intensity of exuberance that had fueled the bubble will deflate it when investor psychology changes from optimism to cynicism. Not only is China’s central bank servicing the margin debt that threatens to collapse markets, but it is funding more of it. That is the fatal flaw and the nemesis of the modern global economic traincrash-in-slow-motion.

Featured image from Shutterstock.

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