Monday, Bloody Monday: The Chinese Stock Selloff Is Back

Well, if you take your cues from China, it was an inauspicious start to the week.

Just one trading day removed from the rather precipitous declines that rocked mainland benchmarks last Thursday, Chinese shares fell again. For those of you keeping score, here’s how this is shaping up:

And here’s what that looks like if you pan out to a YTD view:

As a reminder, last Thursday’ selloff was attributable to a combination of factors, but the main catalysts were jitters about the bond market and the ongoing trials and tribulations of liquor maker Kweichow Moutai, which landed in the crosshairs of state media after a remarkable run that saw the company’s shares rise more than 100% this year on the back of no fewer than 11 upgrades from Goldman.

Well Kweichow Moutai was down again today, logging its seventh straight loss. It’s the second largest stock (by weight) in the SSE 50 and it’s starting to take its toll:

As far as the bond rout is concerned, China didn’t do anyone any favors by merely matching maturities in OMOs on Monday. The PBoC added a net 150 billion yuan last week in an effort to allay concerns about the extent to which new guidelines targeting AMPs are set to squeeze the shadow banking complex further. For reference, here’s a handy guide that shows you where all the money ends up (right hand side):

All told, China has some $15.5 trillion in AUM in AMPs – roughly 60% of that if you net out the cross-holdings.

“The PBOC is reducing the size of its cash injections so liquidity is persistently getting tighter,” SWS Research Co. writes in a new note, adding that “the sentiment won’t significantly improve before concerns on tighter cash supply, tougher regulations and potential higher U.S. rates disappear. Bond yields will fluctuate at high levels.”

Yes, “bond yields will fluctuate at high levels.” This is probably a coincidence, but I know something else that’s “fluctuating at high levels” as money comes pouring out of Chinese assets…