- Watch the RMB fix at 9:15am. Though I would still bet at a relatively unchanged fix, say +-0.2 percent, I don’t think you can rule out a larger move. Two things to note about all this. First, with the stock bailout, I never got the sense that the PBOC’s heart was in it. Most funding moved through other entities and even most capital came from commercial banks. The agency with $3.7 trillion in reserves was essentially standing on the sidelines. I suspect that the PBOC is pushing a less state-led funding model and would not mind letting the RMB move (read: decline) more. The stock market prop up has already lost probably at least RMB 400 billion and the RMB prop up has probably cost at least $50 billion, both of which have achieved very little. Second, there are very real risks to both releasing the RMB and intervening. If the PBOC announces a lower fix and is too loose, I don’t think given the fear in the market you could see significant downward movement. The offshore and onshore rates are diverging significantly and China is spending enormous capital to keep the offshore rate from moving too far. Conversely, by trying to maintain an unrealistic value of the RMB it is having to spend lots of money to accomplish nothing. In short, if the PBOC is too loose the RMB could become the next rout but if the PBOC is too rigid in defending the RMB, they will likely spend lots of money to accomplish nothing, similar to the stock bailout.
- Watch the first hour of the stock market. While Beijing has typically used its firepower late in the day, today I would look for any early signals of public buying. Beijing can’t wait until the end of the day to start buying otherwise the Shanghai Composite will likely be well under 3,000 points. If Beijing is giving up, look for them to tell you early in the day.
- My real concern is all the associated debt. Focus for sometime was on rapid rise in margin lending. However, as a pointed out previously, when margin lending began to decline, that didn’t mean leverage related to stock purchases vanished. It only got reassigned to other forms of debt. The CSF, the primary purchasing agent here, received most capital from commercial banks and has proceeded to lose probably upwards of RMB 400 billion. There is no word on who will bear the losses, but given the decline and amount of bank lending associated with stock purchases, stock related leverage is probably higher now than ever before.
- Given the debt concerns and stock price falls, any firms that are still suspended are probably technically or near technical insolvency. My understanding is that there are nearly 200 firms that have suspended trading in their shares at the moment. It is likely those firms are technically bankrupt or near that point. This is going to present a major problem in any effort to stabilize the Chinese stock market.
- Thanks to the Financial Times Alphaville group and David Keohane for posting my piece on the importance of credibility in financial regulation focusing on China. This is an enormous problem in that people simply don’t believe Chinese economic leadership. The market, both Chinese and foreign, is giving no credibility to anything the PBOC or others are saying or doing.
- Apparently, Chinese stock futures are down significantly pointing to a lower market open. If there is another push downwards, it is quite reasonable to think of 2,500 or less by later this year.
What to Watch for in the Chinese Market a Day After “Black Monday”
Look for early signals of public buying
Christopher Balding , May 12, 2016 9:44am (updated)