Comparisons to 2015 are all the rage these days, what with the Chinese yuan in free fall (if not exactly free float – get it?) and mainland shares falling deeper into bear market territory seemingly by the session, as traders sell into the first sign of strength absent signs that the vaunted “national team” is being deployed.
Most readers probably remember what 2015 was like for Chinese equities.
A margin bonanza sent shares soaring and made day traders out of security guards and equity strategists out of housewives. The following quote is from then-68-year-old Chow Man, a Hong Kong housewife who spoke to Bloomberg for an article dated April 9, 2015:
Things are getting quite exciting. It’s becoming like a hobby for a lot of mainland investors to trade stocks now. That’s why more of them are taking opportunities in Hong Kong.
Chow, Bloomberg wrote, “favored Chinese banks and infrastructure stocks” and if she thought it was “exciting” in April of 2015, she hadn’t seen anything yet.
The bubble burst in spectacular fashion on June 12, 2015 – Hong Kong and mainland shares would go on to collapse.
Chinese authorities rushed in, as a vicious unwind in about a half-dozen backdoor margin lending channels tipped domino, after domino, after domino. By February of 2016 (following the yuan devaluation, the adoption of the RMB basket in December and another panic in January), the Shanghai Composite had halved:
From June to November of 2015, China’s plunge protection team (remember, that’s not a conspiracy theory in China – the “national team” is a literal PPT) bought an estimated CNY1.8 trillion in shares, on Goldman’s estimate.
The following excerpt from a Bloomberg article published amid the rout underscores how absurd things became in August, 2015:
They’re probing suspects linked to the CSRC, including a former employee, over insider trading and forging official document stamps, Xinhua said. Eight people at Citic Securities are suspected of illegal securities trading and the Caijing employees are under investigation for allegedly fabricating and spreading fake stock and futures trading information.
Ah, the “good” old days:
BREAKING: China's well-respected Caijing magazine confirmed 1 of its reporters was arrested by police for a stock market story denied by Gov
— George Chen (@george_chen) August 26, 2015
At one point, a massive number of stocks were simply halted:
Fast forward to 2018 and the analog with that episode is hard for some folks to ignore – even in China. Late last month, for instance, what Bloomberg described as “a study” by the National Institution for Finance & Development, contended that “leveraged purchases of shares have reached levels last seen in 2015.” Here, according to the think tank is what’s likely to happen:
We think China is currently very likely to see a financial panic. Preventing its occurrence and spread should be the top priority for our financial and macroeconomic regulators over the next few years.
Given all of this, you might be wondering how much selling there’s been in mainland Chinese shares during the latest rout compared to 2015. The short answer, according to Goldman, is less than half. To wit, from a note dated Monday:
For A-shares, we look at the cumulative impact of northbound flows, offshore funds (both active and passive) and a domestic flow proxy (which uses bank-to-equity-accounts transfer and margin balance data). Aggregate A-share flows suggest that onshore China equities have seen ~US$100bn of selling (1.8% of market cap), wiping out 5 months of prior inflows. To put this in context, aggregate outflows during the 2015 sell-off were more than twice that amount at US$270bn (6% of market cap).
As far as margin financing is concerned, Goldman’s assessment doesn’t appear to line up with that of the above-mentioned National Institution for Finance & Development.
“Margin financing balance, which currently stands at Rmb 0.9tn (1.8% of market cap), is 15% lower than its ytd peak and has significantly compressed from its peak level of Rmb 2.3tn in 2015,” the bank writes, adding that “current turnover velocity levels are significantly lower than those seen during the 2015 sell-off and 2008 financial crisis.”
Here are the visuals on those points:
Should all of that make you feel any better?
Well, I don’t know. And neither does anyone else.
As our buddy Kevin Muir (of Macro Tourist fame) is fond of saying, trying to assess what the next panic will look like by looking in the rearview mirror almost never works. Additionally, there are reasons to believe that irrespective of what happens in the domestic equity market, the PBoC is in a better position to control yuan depreciation and capital flight than they were in 2015.
Still, the prospect of an all-out trade war raises the specter of a deepening malaise. As Bloomberg reported on Tuesday, Asian hedge fund veteran John Foo “has sold out of Chinese stocks for the first time in his career as a money manager”. Here’s his assessment:
There are indeed cheap Chinese stocks, but there are many uncertainties.
But hey, uncertainty is what makes life fun, right?
As Chow Man would put it:
Things are getting quite exciting.