Quit Hits on Monday’s Stock Market Free Fall

Christopher Balding , July 28, 2015 9:36am

  1. This absolutely did not happen without at least implicit official sanctioning. Government has threatened traders, banned key stakeholders, and endowed CSF with virtually unlimited money to buy the market.  Even the major red chips were limit or near limit down.  This absolutely did not happen without official (in)action.  Maybe CSF regulators were just asleep during the afternoon trading session, who knows right now, but this absolutely did not happen in a vacuum.
  2. I would expect the market to stabilize Tuesday maybe even bounce a little. I would be very surprised to see another drop.  Beijing is fighting enough of an uphill battle with the stock market.  If they let it pick up some momentum, they just might get buried underneath it.  Look for significant resources to enter the market Tuesday.
  3. The market told you what it thinks of the market…..and it isn’t good. Unless Beijing is prepared to dedicate enormous amounts of money or bailout out all stockholders, it is only standing in the way of the correction.
  4. Beijing trying to buoy the stock market is not about political credibility, it is about financial viability. The sheer number of firms still suspended, most of them because they would be in technical default or be required to post new collateral, should tell you something. That would trigger additional selling, defaults, and other nasty stuff.  Further drops are going to push capital to leave the country as foreign capital isn’t even entering anymore.  This has the very real possibility to metastasize into a grade A economic and financial problem.  This is not political.
  5. Beijing always things that they have stopped a problem but are always a few steps behind. Due to the trapped capital, 10 percent trading limits, suspended trading in firms, and short selling bans, just to name a few, traders have taken to shorting other assets or shifting their capital.  According to one report, nearly $250 billion left China in the second quarter when the stock market was booming for most of that time.  Imagine how fast capital will flee if the stock market is not booming. Then it appears that China bears are turning to almost anything linked to China they can short, such as copper and yes, that includes Chinese traders.  Beijing: killing one market only creates other markets.  People and firms will find ways to make money and move their capital.  Even you cannot control a modern financial market by fiat.
  6. Chinese economic weakness is showing signs of spilling over into other emerging markets. Malaysian and Indonesian currencies are back to their 1998 crisis levels and imports from a range of other countries, especially lesser developed commodity exporters, is falling fast lowering growth and increasing credit strains.  Though unlikely to impact Japan, Europe, and North America, the Chinese story will have an enormous impact on emerging markets specifically in Africa and Asia.
  7. Ever ask why those remaining firms with suspended trading are still suspended? Though speculation on my part, I’d bet that these firms would be in default or be required to post additional collateral for loans they took to either play the market or used their own stock as collateral. The fact that so many remain suspended narrows the focus to non-general market concerns but why are those specific companies not trading.  Given what we know about their indulgence in stock pledging, it is worth considering these firms are staying suspended for a reason.  If there are serious problems with this many companies, this means enormous problems not just for the market but all of China.
  8. Quote of the day from China: “On Monday, Zhu Baoliang, director of economic forecast department of the State Information Centre, a government research agency, told Reuters the stock market crash was having a deep impact on the real economy and that it was essential for the authorities to cut interest rates and loosen monetary policy further.” First, apparently Mr. Zhu has not talked to his PR and own statistics bureau. China is achieving 7 percent GDP growth and anyone who says otherwise is mocked and ridiculed by the Global Times and the China Daily. Second, apparently Mr. Zhu needs a basic introduction in macro-economics. Lowering interest rates is going to place enormous stress on the RMB/USD peg and further pushing capital to leave the country. Third, in breaking news, apparently Mr. Zhu has been re-assigned to a county statistics bureau in Inner Mongolia.
  9. Apparently, the Chinese public has a better grasp of economic theory than its leaders. Chatter has been questioning 10 percent daily limits and whether this prolongs panics and volatility. Empirical academic works has consistently found that limiting price discovering increases volatility.

Christopher Balding

Associate professor at the HSBC Business School of Peking University Graduate School.