China On Brink Of Bear Market As State Rescue Fails

An already tenuous situation in mainland Chinese equities deteriorated further Tuesday despite state intervention to stop the slide.

At one juncture, the CSI 300 dropped another 3.2% on top of Monday’s steep losses, taking the decline from last month’s highs to some 15%.

It’s a remarkable slide. To reiterate, the gauge was perched at its highest levels since 2007 just two weeks back.

Just as the bottom appeared poised to fall out in earnest on Tuesday, China’s plunge protection team stepped in. Remember: That’s a real thing in China. No conspiracy theories needed. China established the “national team” (a hodgepodge of state-backed vehicles that acts as a stabilizer when shares fall “too” far or drop at inopportune times) in 2015, when a margin-fueled equity bubble burst, threatening social stability.

The intervention was successful initially, but by the end of the session, mainland shares were down sharply. An equity meltdown during the National People’s Congress doesn’t make for the best optics. Hence the state buying.

This is just another attempt at micromanagement gone awry. Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission and Party secretary of the central bank, warned on “bubbles” in US and European equities earlier this month. Guo also spoke of “reduc[ing] the high leverage within the financial system.”

Those remarks amounted to tossing gasoline on a fire. A bear market now seems inevitable.

It wouldn’t be entirely surprising if state media began to verbally intervene over the next several days to encourage local investors to “act rationally” and “avoid herd behavior,” one of Beijing’s favorite descriptions for momentum in either direction.

The ChiNext, meanwhile, is already in a bear market. It fell through its 200-day moving average this week.

For its part, The Shanghai Composite is down around 6.5% in four days.

Beijing will almost surely keep buying until the worst of the downside pressure abates. But it’s always something of a tightrope walk. Last summer, retail investors came to believe stocks were a one-way ticket higher. “There’s no way I can lose,” a 36-year-old tech startup employee who had recently opened her first trading account told Bloomberg in July, during a rapid rise in local shares. “Right now, I’m feeling invincible,” she added.

That’s the risk for Chinese authorities. The punchline on days like Tuesday is always the same. The media tried to reach out to officials for comment, but the messenger pigeon hasn’t made it back yet. “The China Securities Regulatory Commission… didn’t immediately reply to a fax seeking comment,” Bloomberg dryly noted.