Ok, so everyone woke up on Monday (and “woke up” can be taken both figuratively and literally there) to what we first suggested might be unfolding last week: namely a meltdown in Chinese small caps.
Here’s some background on the ChiNext for those unfamiliar (via FT):
Launched in 2009, the Shenzhen-based ChiNext is modeled on Wall Street’s Nasdaq as a home for start-up companies in emerging sectors. Information technology makes up almost 40 per cent of ChiNext by market capitalization, offering an attractive contrast with the Shanghai bourse, which is weighted towards old-economy stalwarts like banks, property developers and manufacturers. With 656 companies and a total market capitalization of Rmb4.6tn ($685bn), ChiNext is tiny compared with the main boards in Shanghai and Shenzhen, which are valued at Rmb35tn and Rmb22tn, respectively.
Eight days ago, we flagged a 2% slide in the ChiNext as something you should “file away for posterity, because we might be referring to it later on down the road.”
“Later on down the road” turned out to be the following Monday (so yesterday) as far as the mainstream media was concerned. The ChiNext plunged 5% yesterday, a move that was particularly notable as it came despite upbeat econ data, a stronger yuan fix, and PBoC liquidity injections.
PBOC boosted the supply of cash in financial system by most in a month and set yuan’s daily fixing at the strongest level in eight months
— Heisenberg Report (@heisenbergrpt) July 17, 2017
The proximate cause: jitters about the effect Beijing’s continued efforts to deleverage the financial system might have on Chinese risk assets – especially risk assets trading at ridiculous multiples.
By the time it was all said and done (for the day anyway), the ChiNext had fallen to its lowest level since January 2015.
And in an effort to give you some context, we showed you the following YTD chart:
Ok, so fast forward a day and you’ll never guess what China did.
They stepped in and bailed out the ChiNext in the afternoon session.
Does that sound familiar? It should. Because they (probably) did the same thing last Wednesday and if you were following along you read about it in these very pages in a post called “Did China Just Rescue Their ‘Nasdaq’ By Buying A Bunch Of Tech Stocks Trading At 40X?” Here’s the chart from July 12:
See what they did there?
Well if you think that’s some impressive state intervention, have a look at what we got today:
The ChiNext gained 0.7% at the close, reversing a loss of nearly 1% earlier in the session. As for the SHCOMP, it too rebounded, erasing a loss of as much as 0.8%.
For the month, the ChiNext is the picture of ugly:
Just to give you an idea of how bad it was yesterday, consider the following excerpts from a piece published today in SCMP:
More than 2,800 stocks fell across Chinese markets on “Black Monday”, with nearly 500 dropping by their daily limit of 10 per cent, as a financial work conference of the Chinese top leadership sparked fears that the financial sector will face a prolonged period of increased scrutiny.
The sentiment also took a further blow as a flurry of listed companies on the start-up board had warned of significant losses in the first half, including the troubled Leshi Internet Information & Technology.
Over 1,200 stocks declined by more than 7 per cent on the Shanghai and Shenzhen stock exchanges on what analysts dubbed as “Black Monday”.
Combined daily turnover for Shanghai and Shenzhen soared 48 per cent to 570 billion yuan from the previous session.
[…]
“This is a Black Monday,” said Wang Haijun, an analyst for Shanghai-based Zhongshan Securities. “The panic is sweeping across the markets, sparked by a plunge in the start-up board.”
Any questions on whether this was as big a deal as we made it out to be?
Here’s a chart that’s reminiscent of the one shown here at the outset that gives you an idea of just how poorly Chinese small caps have fared versus their global peers YTD:
Again, things turned around on Tuesday – but only late in the day, which certainly seems to suggest that the authorities stepped in.
You should watch this closely as it develops. It’s not 100% clear whether Beijing is going to be willing to intervene like they did in the summer of 2015 to arrest a slide given the push to liberalize/internationalize the country’s markets and given the attention that’s now focused on Chinese equities following (partial) MSCI inclusion.
[Charts: BBG]
