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BofA's Dire Prediction: Only Direct Government Buying Can Save China Stocks Now

Tyler Durden's picture




 

Even after this somewhat catastrophic drop, BofAML warns the Chinese market looks expensive. Deleveraging is likely far from over, they add, concluding that the market is a "falling knife" and only direct buying by the government will mark the bottom.

 

 

 

Via BofAML,

Bottom likely when govt becomes buyer of last resort

 

After reaching a peak of 5,166 on Jun 12, SHCOMP declined sharply by almost 30% to 3,687 within three weeks. The ferociousness of the sell-off even took us by surprise – although we have a 3,600 target for the index, we thought it would take another six months to get there. Given the momentum, the market bottom is highly unpredictable. As a result, we suggest investors stay on the sidelines for the time being. A few points worth highlighting:

 

The market is now a “falling knife”: even after all the government directed marketsupporting measures since last Saturday, including comb rate/RRR cuts, CSRC’s loosening of margin lending control & its cracking down on shorting activities, and organized commentaries from high profile local fund managers, the market still dropped sharply on four of the last five trading days and fell decisively through the psychologically important 4,000 level for SHCOMP. The market has clearly lost its nerve and many investors appear to be rushing to exit.

 

Drastic times calls for drastic measures: the government still has a few policies up its sleeve: it may get affiliated funds such as Huijin and the pension fund to buy, CSRC may suspend IPOs, insurance companies may be encouraged to enter into the market, MoF may cut stamp duty on stock transactions, and PBoC may announce more easing measures, among other possibilities. However, whether or when these policies can stabilize market sentiment is highly uncertain in our view – margin call pressure from unauthorized margin facilities appears enormous; even for those investors not under any immediate margin call pressure, they need to be convinced that the market will go up meaningfully for their leveraged positions to break even (due to high funding costs).

 

Deleveraging in the market is likely far from over: margin outstanding only declined moderately from the peak of Rmb2.3tr on June 18 to Rmb2.1tr by July 2. Deleveraging from unregulated margin channels is likely to be more substantial. Nevertheless, looking at the relatively subdued turnover in recent days, we doubt a significant portion of the positions had been unwound. The 10% limit-down rule is delaying a market clearance.

 

The government to become the buyer of the last resort? All the potential measures mentioned above will largely work on sentiment as direct inflows from these government affiliated entities will likely be moderate by our estimate. If the government fails to turn around sentiment quickly, it may have no choice but to become the buyer of the last resort in the market, similar to what HKMA did in 1998. Even then, things can be complicated: much of the unauthorized margins were used to buy small cap stocks. So the authority, with or without PBoC’s direct involvement, may have to buy stocks on a very large & very broad scale. If and when this happens, it will mark the true market bottom in the short term, in our view.

 

Even after the fall, the market looks expensive: some short term technical bounces aside after things stabilize, we suspect that the A-share market may enter into a multiyear bear market. The large losses could hurt current investors’ psychology severely and it may be years before the pain fades and/or a new generation of investors with no such bad memory emerges. Meanwhile, SHCOMP is still trading at 17x trailing 12M PER (31x ex. banks), with economic growth stalling and market earnings rapidly decelerating.

*  *  *

As Deutsche adds,

"so large are the losses for the 20 million accounts
opened from mid-April to mid-June that in aggregate no money has been
made for 2 years."

Now who could have seen that coming?

 

Now it makes all the sense in the world that China stopped publishing data as we were the only ones who noticed.

 

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Fri, 07/03/2015 - 20:00 | 6267538 Tinky
Tinky's picture

Sure – why the fuck not?

Fri, 07/03/2015 - 20:11 | 6267572 HungryPorkChop
HungryPorkChop's picture

The Chinese crash seems to coincide with Greece's unraveling?  Hmmmmm.  What are the chances? 

BTW: Will this bleed over the pond and to the U.S. & Canadian markets?

Fri, 07/03/2015 - 20:18 | 6267587 dirty dolphin
dirty dolphin's picture

Which is why China should bail out Greece stat.

Fri, 07/03/2015 - 20:34 | 6267632 El Oregonian
El Oregonian's picture

Where's the problem? The .Gov thru the Fed Resv, has been doing that for years now.... What could possibly go wrong?

Fri, 07/03/2015 - 21:43 | 6267813 NoPension
NoPension's picture

With their reserves, they could just outright buy the country.

Sat, 07/04/2015 - 01:35 | 6268249 TruthInSunshine
TruthInSunshine's picture

But China is an unstoppable juggernaut ready to ascend to world economic & military superpower status just as Japan was circa-1989 and no one and nothing can stop China's ascent.

Sat, 07/04/2015 - 05:14 | 6268413 dreadnaught
dreadnaught's picture

ya gotta admit they been stockpiling and buying everything to keep a counrty going like gangbusters over the last 5 years

Sat, 07/04/2015 - 10:07 | 6268618 Arnold
Arnold's picture

The Gov.sino doesn't want all that overpriced  crap.

Make the companys buy their own shares back.

It increases share value, the American way.

Fri, 07/03/2015 - 20:39 | 6267651 order66
Fri, 07/03/2015 - 20:58 | 6267706 rubiconsolutions
rubiconsolutions's picture

Coming soon to a theater near you.

Fri, 07/03/2015 - 20:02 | 6267543 CHC
CHC's picture

They just need to watch how our Fed and Treasury Dept do it here in the U.S.  Hell - buying ain't that hard.

Fri, 07/03/2015 - 20:03 | 6267548 km4
km4's picture

Just like the Fed on propping up US stock market especially since 2008 

Fri, 07/03/2015 - 20:06 | 6267557 km4
km4's picture

Yes! There Is A Plunge Protection Team—–BOJ Bought Stock 143 Times To Stop Drops http://davidstockmanscontracorner.com/yes-there-is-a-plunge-protection-t...

Fri, 07/03/2015 - 20:05 | 6267554 Son of Loki
Son of Loki's picture
Weidà !
Fri, 07/03/2015 - 20:07 | 6267561 Soul Glow
Soul Glow's picture

Was there any type other than government buying before?  As fascist as the US is China is equally so.  Only central banks buy stocks now, everyone else just hangs on for the ride.

Fri, 07/03/2015 - 20:08 | 6267562 Yen Cross
Yen Cross's picture

  In all honesty, I think the Asian markets are going to pop next week. It's not for the right reasons, but they're insanely oversold, and the risk~reward is better than other equity ideas.

 I'd probably be buying some RUT calls. Are you listening ?

Fri, 07/03/2015 - 20:22 | 6267595 Soul Glow
Soul Glow's picture

Greece defaluts sending Europe crashing but China makes it out alive?  

Yeah right.

Fri, 07/03/2015 - 20:42 | 6267659 kaiserhoff
kaiserhoff's picture

Could be, Yen, but 60% of all munie funds held Porto Rican bonds, which they will try to sell now that it's officially junk.

Next week will be interesting.

Fri, 07/03/2015 - 20:54 | 6267700 Soul Glow
Soul Glow's picture

Lots of private money hplds those bonds too.  Firms such as Edward Jones buys blocks in the millions everyday.

Fri, 07/03/2015 - 20:10 | 6267571 falconflight
falconflight's picture
SSE Composite Index

 -Shanghai 

Off nearly 1,500 point from its YTD (5,000) highs, something is up, but the Hang Seng not nearly so much.

Fri, 07/03/2015 - 20:31 | 6267625 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

Boo m'effin' hoo,  you get a paper cut?  Bad man f#(k you over with mean ol' pump n' dump scheme?  Welcome to capitalism bitchez!  Where we skull fuck farmers' housewives just because we can!  Now STFU or we'll build another great wall and use your tears to mix the mortar!

Fri, 07/03/2015 - 20:40 | 6267655 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

Damn that was cold!  This is eerily reminiscent of Nippon's great pump n' dump of the late 80's/ early 90's.  Media plays up 'Murica getting it's lunch ate by the asian boogie man, then low and behold! they get their comeuppance.  I reckon Wall Street is doing God's work,-- well if your god is Mammon that is. 

Fri, 07/03/2015 - 20:34 | 6267639 Botox4U2
Botox4U2's picture

Chinese are starting to wake up and are selling stocks to buy

https://www.bitgold.com/

Sat, 07/04/2015 - 11:09 | 6268830 g speed
g speed's picture

a chinaman who sells his stock today pays the gang that loaned him the money to gamble first---then there is nothing left except more to pay cause that kind of loan has no payof. The ones that can afford to buy gold buy Lambos and ijunk instead--and maybe a shack in Vancouver.

Fri, 07/03/2015 - 20:40 | 6267654 Bull Bear Nice Pair
Bull Bear Nice Pair's picture

The Chinese stock has dropped 30% - that's about $3 trillion! Oh my my! Now look carefully: the value of Chinese stock was about $5.7 trillion at the beginning of 2015. It grew to about $10.3 trillion at the maniac peak in early June. The Chinese stock now valued at about $7 trillion, still 1.3 trillion, or about 23% higher, than Jan. 2015.

Why should anyone believe the crooks at BofA is beyond me. The current valuation of Chinese stock ($7 trillion) is about 70% of Chinese GDP (about $10-11 trillion). In comparison, the U.S. stock is valued at about 140% of the U.S. GDP ($23 trillion vs $16-17 trillion, GDP being almost same as GNP). Further more, the current value of the Chinese stock ($7 trillion) is only 33% of China's bank deposits ($21 trillion). In the U.S., current value of stocks ($23 trillion) is about 200% of the U.S. bank deposits (about $11-12 trillion). The Chinese stock has increased its value by about 14x since 2005. It is a big deal in relative terms, but no big deal in absolute terms.

What the BofA crooks fail to disclose to the debt serfs here in the U.S., is of course, the $30 trillion derivative that can blow up in everyone's face at any moment.

 

 

 

Fri, 07/03/2015 - 20:55 | 6267691 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

Those are excellent points! (I'm conceding that your numbers are accurate, because they make sense)  How much of the Chinese stock market run up is attributable to Western (especially 'Murcan) investment?  And can that investment be inserted, and pulled back, and inserted again (much like a big 'Murcan dong) to wreck havoc on the tight little asian market?

Sat, 07/04/2015 - 05:40 | 6268429 biggestbrother
biggestbrother's picture

Sure. 

You are right.

 

However there is some tiny chance of fair trade when you trade in the US. There is ZERO chance of that with Chinese stocks cos markets dont do well, in fact they dont do at all, if the data is rigged as it is in China. 

No reporting rules, no courts, just one big mafia run country of 1 zixth of the population. 

 

You would be a fool to buy CHinese stock. 

Sat, 07/04/2015 - 10:16 | 6268727 post turtle saver
post turtle saver's picture

whoever downvoted you either hasn't been paying attention or refuses to believe what's standing right in front of them... you're absolutely correct

Sat, 07/04/2015 - 10:32 | 6268753 The Merovingian
The Merovingian's picture

My Dad's been dead for 5+ years now, and was lousy with his own money. But, he did pass along one pearl of wisdom that I have yet to see proven incorrect ... "Never do business with a Jew or a Chinaman".

Sat, 07/04/2015 - 13:47 | 6269290 wendigo
wendigo's picture

I have a chinese partner, in China, who's the most trustworthy man I've ever met. 

 

My brother in law is Jewish and I would have no problem entrusting my life to him. 

 

YMMV

Sat, 07/04/2015 - 11:43 | 6268905 g speed
g speed's picture

 BBNP--I down voted you cause you still don't get that value and price are not the same thing--or---maybe you're a troll trying to confound the newbees.

why should anyone believe you---where did you get your "facts and figures" ----china town? 

fact 1   Europe is biggest market for China( a mercantile economy--just like half of europe) -- oops-- oh yeah and Brazil too--thats going swimmingly

fact 2  Demographics of China tell a tale of ageing, failing health, gambling addiction and slave wages.

fact 3  Central party planning of the economy led to malinvestment, crony corruption, rehypothecation x infinity of wharehoused commodities, empty cities, phony IPOs, realestate bubble, inflated stock prices, shadow lending (and borrowing), a glut of production facilities, massive invisible QE (printing), capitol flight, and of course false reporting of economy by the gov't.

What could possible go wrong??

Fri, 07/03/2015 - 20:53 | 6267694 B2u
B2u's picture

Sum Ting Wong

Fri, 07/03/2015 - 21:00 | 6267713 Downtoolong
Downtoolong's picture

The Government to become the buyer of last resort

As always the last and greatest of the greater fools to come along and socialize the losses.

Fri, 07/03/2015 - 22:32 | 6267953 GRDguy
GRDguy's picture

Can you imagine the local government using taxpayer money to prop up Al Capone and his gang?

Sameo-sameo. Same type circus, just different clowns.  The ticket-buying audience is so gulliable.

Fri, 07/03/2015 - 21:09 | 6267736 Clowns on Acid
Clowns on Acid's picture

Print and buy. Thats a complicated algo that Greensoan started then passed on the secrets to Bernanke, and then they converted it into pictures for Yellen.

Fri, 07/03/2015 - 21:10 | 6267742 bid the soldier...
bid the soldiers shoot's picture

 

Figures

The Chinese characters for "greater fool" are pronounced Merrill Lynch (BofA) 

 

It sounds they're in 200% and they  --  he he he --  expect Beijing to bail them out

Fri, 07/03/2015 - 21:22 | 6267769 williambanzai7
williambanzai7's picture

Stocks in China will absolutely never ever have anything to do with fundamentals.

Fri, 07/03/2015 - 21:30 | 6267787 fowlerja
fowlerja's picture

It is hard to take stock of the present situation..hope everything gets settled!

 

Fri, 07/03/2015 - 21:54 | 6267839 I Write Code
I Write Code's picture

Just add my voice - Fed has been doing that here for some secret number of years, but in large volume and by my guess for each and every listed equity, for the last three years.

Fri, 07/03/2015 - 21:58 | 6267855 roddy6667
roddy6667's picture

It's paper profits they made on the way up. No BFD.

Sat, 07/04/2015 - 11:47 | 6268925 g speed
g speed's picture

cost averaging---

Fri, 07/03/2015 - 22:01 | 6267866 scatha
scatha's picture

The almost all world stock markets are being bought by CBs, ECB, Japanese CB, FED, SNB, Israeli CB and many other governmental institutions are buying stocks like crazy for years now including volatile stocks of Apple, Goggle, FB etc.,. Otherwise they would have lost half of the value. PBOC just joined the party.

If you would remove all the regulations that pump the NYSE it would return to fundamentally driven value of about 3000.

Those worshipers of free markets will never abolish all state regulations since only through them they are making such a huge amounts of money.

A nice take of fallacies of so called "free markets" I found at:

https://contrarianopinion.wordpress.com/2015/01/29/invisible-hand-and-ot...

 

Fri, 07/03/2015 - 23:29 | 6268044 Super Hans
Super Hans's picture

Avoid falliing knives for sure. I'm a little concerrned because we do have one Chinese supplier. 

Hope all ZH'rs are safe and sound this 4th of July!

SH

Fri, 07/03/2015 - 23:49 | 6268083 jerry_theking_lawler
jerry_theking_lawler's picture

Very good. Very, Very good. Teaching the Chinese retail a lesson now....hopefully they will learn versus US retail.

After all retail is out, then the snake will begin consuming itself, each market will try to consume the other.

Times are getting closer til the end of this entire racket. Thank goodness.

Sat, 07/04/2015 - 00:10 | 6268121 damicol
damicol's picture

I know what Chinese think.

What !!! the fucking government is interfering, Somethings seriously wrong.

Fucking sell.. NOW

 

Sat, 07/04/2015 - 00:56 | 6268189 bluez
bluez's picture

I believe that at the end of the day, paper things like stocks, currencies, derivatives, etc. are meaningfull only to those who deal in them.

Nations with industry, specifically with strong and diverse domestic potential productionality will win. Those with weak and fragmentary domestic potential productionality will lose.

Detroit is our biggest national cemetary.

Sat, 07/04/2015 - 02:17 | 6268289 q99x2
q99x2's picture

Print

Sat, 07/04/2015 - 04:41 | 6268383 Panic Mode
Panic Mode's picture

Same as your government, dick. Your government have been doing this and ripping other countries for a LONG time.

Sat, 07/04/2015 - 07:47 | 6268504 Batman11
Batman11's picture

They blew a ridiculous bubble and it's popped.

Perhaps China will be able to learn from its mistakes and not let it happen again.

Here in the West we have been blowing bubbles and popping them since Tulip Mania in 1600s Holland.

We never learn. 

Sat, 07/04/2015 - 09:04 | 6268615 Baby Eating Dingo22
Baby Eating Dingo22's picture

One pill makes you larger

One pill makes you small

 

China brokerages pledge to buy $19.3 billion in shares to steady plunging market


By Michael Martina

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BEIJING (Reuters) - China's top securities brokerages said on Saturday that they would collectively buy at least 120 billion yuan ($19.3 billion

of shares in a bid to stabilize the country's stock markets after a slump of nearly 30 percent since mid-June.

The pledge follows near-daily official policy moves over the past week, including an interest rate cut and a relaxation of margin lending rules, that have so far failed to arrest the sell-off, which some market watchers fear could turn into a full-blown crash.

The rout in China's highly leveraged stock market has become a major worry for international investors, who fear a meltdown could further destabilize the global economy even as Greece risks crashing out of the European common currency.

China stocks had more than doubled over the past year, fueled in large part by investors using borrowed money to speculate on further gains.

The brokerages met on Saturday in Beijing to discuss the market situation and expressed "full confidence" in the development of China's capital markets, a statement on the website of the Securities Association of China said.

"Twenty-one securities brokerages will jointly invest 15 percent of net assets as of the end of June, or no less than 120 billion yuan, in blue chip exchange traded funds," it said.

The brokerages will not sell off holdings as long as the Shanghai Composite Index is below 4,500 points, the statement said.

That could leave them saddled with heavy losses on paper from the start. The SSEC index fell 5.8 percent on Friday to end at 3,684 points.

Listed securities companies among the 21 brokerages, along with their major shareholders, also would buy back shares.

Hong Hao?a chief strategist at BOCOM International?said he was confused by the slew of measures announced recently.

Hao doubted the latest plan would be enough to arrest the price slide?and said it could sow the seeds of fresh problems in the future by further distorting the market.

"Around 120 billion yuan is not enough?but if leverage (more borrowing) is used?it could expand to over 500 billion yuan and that may have some effect," he said.

Moreover, while brokerages were likely to focus on stronger, blue-chip companies, Hao said there would be little interest in saving small and wildly overvalued "growth" firms. Such companies are favored by ordinary investors from cashiers to taxi drivers, but have suffered some of the most savage declines in recent weeks.

POLICY CONFUSION?

Just a few months ago, state media had been exhorting the market's rise, saying China's bull market had just begun and denying that it was in a bubble. Investors big and small took that as a government signal to buy.

Now, Beijing is struggling to find a policy formula to restore confidence in the market before too much damage is done to the world's second-largest economy.

Weighed down by a property downturn, factory overcapacity and high levels of local government debt, China's economic growth had already been expected to slow to around 7 percent in 2015, robust by global standards but its weakest annual expansion in a quarter of a century.

After the market close on Friday, the China Securities Regulatory Commission (CSRC) said China would cut initial public offerings and capital raisings and support long-term investors entering the market to help stabilize prices.

The People's Bank of China (PBOC) also rolled over 250 billion yuan of medium-term loans to banks late on Friday to ensure adequate liquidity in the system.

Investors say constant tinkering with monetary policy and regulations to try to temper the stock market slide raises wider questions about whether China is ready to open up its capital markets and have more influence in the international financial system.

(Additional reporting by Samuel Shen in SHANGHAI; Editing by Kim Coghill)

Sat, 07/04/2015 - 11:53 | 6268946 g speed
g speed's picture

--when you're ten feet tall----

Do NOT follow this link or you will be banned from the site!