Chinese stocks came under immense pressure on Thursday, plunging nearly 3% on the one-week anniversary of the SHCOMP’s worst day since February 2016.
According to reports, Thursday’s losses might have been accentuated by margin calls as brokers liquidated stock pledged as collateral for loans. This isn’t a new risk in China and regulators know it’s a problem. Share-backed lending is rampant over there. When these things get moving in the wrong direction and corporate borrowers can’t (or won’t) pony up for margin calls, the collateral gets dumped and it’s adios muchachos (I don’t know what that is in Mandarin).
The SHCOMP is now sitting at a fresh “since November 2014” nadir, and it certainly seems like the National Team’s commitment to defending the 2016 lows is questionable at best.
This was the third day this month that the benchmark has fallen by ~3% or more in a single session.
You can probably attribute some of Thursday’s losses to expectations that the yuan is now “free” to weaken further after the U.S. declined to label China a currency manipulator on Wednesday in Treasury’s semi-annual report.
Following the report, and after the PBoC weakened the fix by 0.25%, the onshore yuan fell to a 21-month low.
The disparity between global equities (MSCI AC World) and mainland shares in China since the halcyon days of late January is quite something to behold.
Clearly, Chinese authorities will need to step in and deploy the state-backed funds in the interest of preserving stability here, because it looks like this is about to start snowballing. As a reminder, Goldman earlier this week suggested that Chinese shares could fall another 10%-30% under an adverse scenario. Here’s a handy table from that note that shows you a history of MSCI China drawdowns:
If you’re in the mood to go “bargain” hunting in A-shares, this is what you’re looking at multiples wise (and these have compressed further after today):
Is this a falling knife? Probably. Because there’s no light at the end of the tunnel on the trade conflict and when it comes to the yuan, China is damned if they do and damned if they don’t. Depreciation shields the economy but poses a risk to sentiment and risks angering Trump, while intervening to push the currency stronger than the market would otherwise dictate risks deep-sixing exports.