The euphoria that gripped markets to start the week gave way to a kind of “Ok, what now?” mood Tuesday, as Chinese stocks cooled and the dollar rose.
“Equity markets love to be told what to do. You can almost hear them asking [today] what to do next”, former trader Richard Breslow wrote.
The Shanghai Composite managed just a small gain Tuesday. Monday’s epic surge added nearly a half-trillion to Chinese shares’ market cap. Mainland equities have run ~15% in just a half-dozen sessions.
Volume on the CSI 300 was triple the three-month average Tuesday. Leverage is the highest in more than four years.
The SCHOMP isn’t the global risk-asset bellwether — that title belongs to the S&P. So, the idea that a new equity mania in China will be sufficient to drag global stocks higher all by itself seems far-fetched.
Although gains at the benchmark level were relatively muted in China Tuesday, liquor maker Kweichow Moutai (China’s largest stock by market cap) rose nearly 6%. The yuan briefly strengthened below 7.00, a notable development.
The selloff in Chinese bonds has pushed the spread with Treasurys to a record high.
“The key question is why China has decided to jump-start its stocks now?”, Rabobank’s Michael Every wondered. Here’s a bit more from Every’s Tuesday missive (and this really is good stuff):
Why, when locals will act accordingly and listen to the authorities when they tell them where they are about to get their ‘guaranteed’ minimum 20% annual return; and they follow that smooth, paved path through the financial jungle;…until it all ends in 2015 chaos again. Moreover, why given bond yields are spiking as a result, which a debt-laden economy cannot afford? Why, as punters walk away from Wealth Management Products, pulling the funding rug out from under the feet of many property projects as a result? Perhaps to jump-start consumption? Yet property is more widely-held than stocks. Perhaps to stop the property bubble getting out of control? If so, stocks are hardly a less dangerous tiger to ride. Perhaps to swap debt for equity? Except bond yields are rising, which hurts most borrowers more than some can gain through stocks. Perhaps to encourage firms to tap unlimited CNY equity capital and not (soon to be limited?) offshore USD debt? Perhaps to help push CNY back to 7.01 to try to ease some of the looming US political pressure on China in that USD regard? Or, as suggested yesterday, if pressure can’t be eased, perhaps to allow for an immediate signal-sending 2.5% fall in CNY without taking it into a range that would suggest to the world that China is no longer master of its own destiny? (And on USD/CNY it isn’t: not while the US holds the sanctions trump card.) Perhaps simply to try to get those USD capital inflows by hook or by crook to keep the game going: “Look, you can’t miss out on this!”?
Great questions, all.
Apparently, Chinese brokers’ trading apps are having a difficult time with the sudden surge in activity. “Users reported intermittent service connections and slowness at trading app of Huatai Securities on Tuesday, while another leading broker, Guotai Junan Securities, also had delays in real-time pricing and money transfer on Monday”, Bloomberg reports, adding that “the glitches came as trading volume in the mainland stocks boomed, hitting a five-year high and totaling 3.2 trillion yuan ($455 billion) in the first two days of the week”.
Authorities in Beijing need to be careful what they wish for. You’re reminded that back in the summer of 2015, when the last equity bubble in China burst, officials were forced to establish the “national team”, a consortium of state-backed vehicles which acted as a literal plunge-protection unit to shore up markets. That apparatus still exists and is mobilized from time to time. But it’s not clear whether it’s desirable to own the froth created by the clueless masses once they abandon ship.
Additionally, as Every notes in the excerpted passages above, the risk-on fever is contributing to a bond selloff that was already underway. Rising yields are beginning to manifest in the credit market, which in turn has the potential to freeze new corporate bond deals. If that dynamic continues apace, the PBoC may be compelled to add liquidity.
In any event, it’s hard to imagine how anything good will come of this latest attempt by Beijing to deliberately inflate an equity bubble.
The Party is quite adept at maintaining control across all aspects of life in Xi’s China. But one dragon they cannot tame is that comprised of a gazillion starry-eyed retail investors clamoring for a piece of the action in a stock market run wild.