I’ve cautioned recently against reading too much into a monumental rally in Chinese shares.
My aversion to Chinese equities is nothing new, and I make no secret of it. I’m not enamored with the idea of entrusting capital to a man (Xi Jinping) who’s avowedly averse to capitalism. But that actually wasn’t my main concern with the rebound in China. That’s my main long-term, fundamental concern, but my near-term worry was that during mini-manias like the one witnessed in recent weeks, mainland shares are a playground for emotional retail investors trying to piggyback state-buying, while H-shares are a playground for hedge funds and hot money. I don’t want anything to do with either.
On the latter point, the implication’s clear enough, and in case it wasn’t, I made it explicit on October 3 in “Hedge Funds Won’t Stick Around In China Unless Xi Delivers.” The title is really all you needed. By the time retail investors got around to aping David Tepper, the money was made. Xi’s bureaucrats had one shot to hang onto hedge funds and they blew it on Tuesday, when NDRC chair Zheng Shanjie botched a high-profile press conference.
As it turns out, the fast money bailed immediately, and not just from Hong Kong, but from mainland equities too. In fact, A-shares saw the biggest selling impulse, according to Goldman. “As the NDRC underwhelmed, hedge funds rapidly sold off Chinese equities,” the bank’s prime desk said, in a Thursday dispatch.
The figure on the right, above, shows the biggest single-session net-selling of Chinese stocks in Goldman’s records. And it wasn’t close. As the bank noted, “to put this in a historical context, this net selling was 1.4 times larger than the previous record for net selling and represents a 6.5 Standard Deviation event.”
Three-quarters of that selling was from mainland shares, as hedge funds sold into the post-holiday catch-up rally which, you’ll note, collapsed the very next day.
Meanwhile, former PBoC deputy Fan Yifei was sentenced on Thursday in connection with what the Party said was a one-man, three-decade, $54 million influence-peddling operation. In January, CCTV ran a documentary about Fan’s career as a corrupt Party functionary. “I wanted to be an official and be rich at the same time,” he explained.
And he was. Fan was an official and he was rich. I hope it was worth it. Fan’s sentence: Death, commuted to life in prison. “Fan accepted bribes of an extremely large amount,” the court said. “The social impact was extremely bad.”
