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Hong Kong Hammered As China Crash Contagion Continues

Tyler Durden's picture




 

Submitted by Pater Tenebrarum via Acting-Man.com,

Efforts of Potent Directors Ignored

When we first commented on the emerging problems with China’s market bubble, we warned that although a bounce from oversold levels was the most likely outcome, it wasn’t set in stone. It appeared to us that Chinese investors were especially prone to falling for the “potent directors fallacy” (a term coined by Robert Prechter of EWI many years ago) – the belief that powerful decision makers, in this case the central bank and the government – would be willing and able support the market no matter what.  Willing they have been – able, less so.

 

Oops

Chinese retail investors are shell-shocked

Photo credit: EPA

For a long time it has been the general impression that due to its tight control over the banking system and other sectors in the economy, China’s leadership could just “order the markets around”. Investors who were aware of China’s enormous debt problems and its insanely overvalued real estate markets were regularly baffled by the fact that China’s mandarins were apparently capable of  arresting any decline in prices or any emerging credit blow-ups with the flick of a finger. Faith in their abilities is currently being shaken to its core. This is highly relevant to the asset bubbles currently underway in other countries, even though what happens in China has little direct effect due to the country’s closed capital account.

 

SSEC

China’s stock market crash just keeps going – the index has now reached an important lateral support level. It will probably bounce from there, but for a variety of reasons this is actually somewhat less certain than it would otherwise be – click to enlarge.

 

The latest gambit of China’s central planners has been to replace the increasingly wobbly looking real estate bubble with a stock market bubble. The plan, as far as we can tell, was to enable state-owned companies to raise a lot of equity at favorable prices, so as to lessen the relative importance of their debt load, resp. enable them to deleverage by putting the proceeds of stock offerings toward paying down debt. However, the stock market bubble rested on an extremely shaky foundation: inexperienced retail investors and just as inexperienced fund managers were the main buyers, and they used plenty of margin to do so. Now they are in an unmitigated panic.

How to Shoot Oneself in the Foot

In their desperate effort to halt the decline in stock prices, China’s authorities have tried every trick in the book and then some. The latest gambit was initiated by listed companies, and may well have been the equivalent of shooting oneself in the foot: In order to stop stocks from declining further, many were simply suspended from trading. Some of those are suspended because they keep trading “limit down”, but in many cases the trading halts were requested by the companies themselves (the exchange must give its placet to such trading halt requests).

As a result, some 27% of listed companies are currently no longer trading, representing approx. $1.4 trillion in market cap. This is reminiscent of the futile attempts to halt stock market declines in the US and Europe by banning short sales in 2008 (as well as on other occasions, e.g. in early 1932, a short selling ban that was followed by a 69% plunge in stock prices).

As Bloomberg reports:

“Chinese companies have found a guaranteed way to prevent investors from selling their shares: suspend trading.

 

Almost 200 stocks halted trading after the close on Monday, bringing the total number of suspensions to 745, or 26 percent of listed firms on mainland exchanges, according to data compiled by Bloomberg. Most of the halts are by companies listed in Shenzhen, which is dominated by smaller businesses.

 

The suspensions have locked up $1.4 trillion of shares, or 21 percent of China’s market capitalization, and are becoming increasingly popular as equity prices tumble. If not for the halts, a 28 percent plunge in the Shanghai Composite Index from its June 12 peak would probably be even deeper.

 

“Their main objective is to prevent share prices from slumping further amid a selling stampede,” said Chen Jiahe, a strategist at Cinda Securities Co.”

 

Later, the number of halts requested increased to more than 1,200, the 21st Century Business Herald said, citing exchange data. The Shenzhen Stock Exchange will reject unjustifiable applications for suspensions, QQ.com reported, citing an unidentified person familiar with the matter.

As an aside, the assertion that the stock market rout has “erased at least $3.2 trillion in value” as most financial media are reporting is a rather unfortunate way of putting it. What has changed are merely stock prices. In a way, the previous “values” were largely fictional. They reflected the fact that many in China felt they had discovered a get-rich-quick scheme and were piling in. The “wealth” this has created was phantom wealth – nothing has changed about the underlying businesses just because their stock prices have soared, nor has any money been destroyed because they plunged – it has merely changed hands.

Why are trading halts counterproductive? For one thing, as most of the suspensions concern small caps, investors are now trying to rescue themselves by selling big caps. For another thing, it deters new buying, because investors must fear that they will be locked out again from trading their shares at some point in the future – this has lowered the potential for a significant bounce. Also, while the decline has superficially slowed due to trading halts, the potential for an even bigger decline is now hanging over the market, as those holding suspended shares are likely to sell as soon as it is possible again.

Another effect was that the spillover to the Hong Kong Stock Exchange has worsened considerably. The HSI has crashed by almost 2,100 points or 8.37% overnight:

 

HSI

The HSI in Hong Kong begins to crash as well – click to enlarge.

 

Why Are the Authorities Helpless?

There is actually a good reason why China’s authorities have been unable to stop the crash so far, in spite of their otherwise well-known ability to influence markets and the economy. China is beginning to feel the lagged effect of the massive slowdown in money supply growth over recent years. This increasingly unmasks capital malinvestment in China and makes it more difficult to keep asset bubbles supported.

 

M1 and M2 China-growth rates

The year-on-year growth rates of the monetary aggregates M1 and M2 in China have collapsed to the lowest level in more than 15 years – click to enlarge.

 

China’s authorities are now finding out that one cannot have everything at once. If a credit bubble is to be deflated, asset prices cannot grow to the sky at the same time. Rising stock and real estate prices require “fuel” in the form of money supply inflation, and a slowdown in credit extension automatically brings about a slowdown in money supply growth in the modern-day fractionally reserved fiat money system.

As a result, even if the market should begin to bounce from here, it will very likely remain a “sell” until money supply growth has accelerated again for a while. This is however unlikely to happen anytime soon, as China’s banks are increasingly reluctant to add to their burgeoning credit problems (these don’t exist officially, but everybody knows they are simply masked by accounting tricks).

Prime minister Li Keqiang wants to reform China’s economy and is also unlikely to order banks to massively increase their lending again. He may of course eventually well be outvoted by others in the politburo, but at the moment, he remains in charge of economic policy.  Note in this context that stock prices fell again on Monday after Li Keqiang failed to mention the stock market crisis in an official statement on the economy.

Conclusion

No bubble can remain aloft without a heavy dose of monetary inflation. The fact that China’s authorities, including its central bank, have been unable to stem the decline stands as a stark warning to the many Western investors who seemingly believe that central banks are nigh omnipotent entities run by magicians. This is not the case. Once an asset bubble begins to burst, there there is nothing central bankers can do to stop it – and we have plenty of bubbles awaiting their turn in the barrel.

 

Li_Keqiang_(cropped)

China’s premier Li Keqiang: Apparently not sympathetic toward stock market speculators.

 

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Wed, 07/08/2015 - 20:35 | 6288023 stant
stant's picture

No glitchez bitchez? NYSE showed ya how its done

Wed, 07/08/2015 - 20:47 | 6288064 wolfnipplechips
wolfnipplechips's picture

Bingo, bro...this mf'r is burning down before our very eyes! Or at least those not preoccupied with confederate flags and gays getting hitched.

Wed, 07/08/2015 - 20:50 | 6288072 Manthong
Manthong's picture

I’m willing to bet that more than a few folks get executed out of this one.

If only we were that judicious here.

Wed, 07/08/2015 - 20:52 | 6288079 johngaltfla
johngaltfla's picture

Man, this big suck feels like 2008. Hopefully everyone has loaded up on the correct 3x Ultra Short ETFs :)

Thu, 07/09/2015 - 09:18 | 6289515 Datafox
Datafox's picture

And what are the odds that the feds are going to raise rates in September so as to provide cover the that same 2008 outcome? I now put it at 90% with a crisis beforehand getting out of hand being the outlier. 

Falls right in line with my cruise ship analysis. 

I'm feeling nostalgic already... 

https://youtu.be/m3FGVFAgY_I 

https://youtu.be/_KClpLzFftU

 

Wed, 07/08/2015 - 20:59 | 6288098 Stormtrooper
Stormtrooper's picture

Where's the banker suicides. We need some excitement to lighten up the atmosphere.

Wed, 07/08/2015 - 21:20 | 6288170 NoDebt
NoDebt's picture

My phone's finally been ringing for nail gun work after a long drought.  The pussies in the US and Europe say my methods are too "high profile" and "raise too many questions".  The Chinese apparently have no such reservations.  I've been learning Mandarin and Cantonese the last couple of weeks.

Give me some time to work.

Wed, 07/08/2015 - 22:11 | 6288326 Kirk2NCC1701
Kirk2NCC1701's picture

If we put hyperbole  ("burning down before our eyes") aside, it is clear that China has taken the lead in bringing back Price Discovery. 

Even if some of the wrong people (sheeple) got hurt,  and perhaps some of the right people (Globalist Speculators, like Soros, the Squid, the Morgue).

Like the Chinese Premier, I too hold these Parasites in contempt and disgust.

Wed, 07/08/2015 - 20:47 | 6288065 kliguy38
kliguy38's picture

are those guys constipated

Wed, 07/08/2015 - 21:21 | 6288175 ebworthen
ebworthen's picture

Has to be some intestinal stress.

That flush is going to leave some skid marks.

Wed, 07/08/2015 - 21:10 | 6288138 williambanzai7
williambanzai7's picture

CHAIRMAN MA

Thu, 07/09/2015 - 03:03 | 6288887 Nobody For President
Nobody For President's picture

Insanley great, WB ! 

Wed, 07/08/2015 - 20:35 | 6288026 max2205
max2205's picture

That's,  like, 2 AAPLs 

 

Big wooop 

Wed, 07/08/2015 - 22:08 | 6288320 Abbie Normal
Abbie Normal's picture

Actually closer to four; then it will increase exponentially as the market crash worsens and AAPL stock also declines.

Wed, 07/08/2015 - 20:35 | 6288027 Chad_the_short_...
Chad_the_short_seller's picture

Wow, this is getting fucking CRAZY!!! And fuck me for selling my chau, ashr and chau puts. I would have made over $300,000 had I kept them.

Wed, 07/08/2015 - 20:37 | 6288028 suteibu
suteibu's picture

Japan down over 2% as well.

Oops...almost 3% now.

Wed, 07/08/2015 - 20:37 | 6288037 Jlasoon
Jlasoon's picture

Korea and Australia sliding.

Wed, 07/08/2015 - 20:40 | 6288041 suteibu
suteibu's picture

Japan down 3.11%.  Closing fast on 19K

Wed, 07/08/2015 - 20:52 | 6288080 davidalan1
davidalan1's picture

make that over 5%

cliff dive

Wed, 07/08/2015 - 20:59 | 6288097 TeamDepends
TeamDepends's picture

The Yap Islanders had an excellent fishing day, so it wasn't all bad.

Wed, 07/08/2015 - 21:14 | 6288151 Not My Real Name
Not My Real Name's picture

Prunge Plotection Team to the rescue: now down only 2.3%

Wed, 07/08/2015 - 21:22 | 6288182 NoDebt
NoDebt's picture

I love watching the world's "largest, deepest, most liquid markets" bounce around like penny stocks.  It's confidence-inspiring.

Thu, 07/09/2015 - 01:18 | 6288763 wolfnipplechips
wolfnipplechips's picture

Agreed. It does take some of the sting out knowing that these bankster doosh bags are getting rim-checked this round. The cynical side of me wants a good old fashioned unraveling over the next several days. Going to be fun but scary if these Asia markets continue the hemorrhaging.

Wed, 07/08/2015 - 20:39 | 6288040 Yen Cross
Yen Cross's picture

  The Hang Seng cash doesn't open for 20 minutes or so.

The Nikkei icash is open though...We're gonna need a bigger boat.

  Nikkei 225 19,146.50 19,737.64 19,716.00 19,091.50 -591.14 -2.99% 0:36:55
Wed, 07/08/2015 - 20:40 | 6288043 JustAboutThatAc...
JustAboutThatActionBoss's picture
Zài jiàn
Wed, 07/08/2015 - 22:11 | 6288327 Abbie Normal
Abbie Normal's picture

lau pon yo

Wed, 07/08/2015 - 20:45 | 6288051 davidalan1
davidalan1's picture

Lets see...hmmmm

NYSE down 3.5 hours "glitch"

Greek toasted, banks shut for another week

Puerto Rico soon to follow

China carshing

Hong kong

No clue here...

after watching and waiting for over twenty years..Im seriously pondering ordering a shit load of Toilet paper,

among other things

Wed, 07/08/2015 - 20:46 | 6288059 suteibu
suteibu's picture

Got an attic full of TP and PT.  All else fails I can wipe my ass and blow my nose.

Wed, 07/08/2015 - 20:46 | 6288056 Dixie Flatline
Dixie Flatline's picture

All is well.  China strong like dragon.  

Wed, 07/08/2015 - 20:46 | 6288061 Amish Hacker
Amish Hacker's picture

It's amazing how fast a buying frenzy can turn into a selling panic. It's like a switch in the collective consciousness of all those Chinese investors suddenly got flipped. Good thing we're smarter than that here in the US, eh?

"Credit"--->Latin credo, "I believe."

Wed, 07/08/2015 - 20:48 | 6288068 suteibu
suteibu's picture

"Credit"--->Latin credo, "I believe."

Interesting.  What is "I don't believe?"

Wed, 07/08/2015 - 20:53 | 6288084 Tinky
Tinky's picture

"derivative"

Wed, 07/08/2015 - 21:00 | 6288106 disabledvet
disabledvet's picture

You can have rhetoric ..."truth in lies."

In a panic there is no "derivation of truth" however.

Wed, 07/08/2015 - 20:56 | 6288091 disabledvet
disabledvet's picture

In Vino Veritas

NOTHING CAN STAND IN THE WAY OF THE DEFLATION.

HOWEVER...
You still have exceedingly low rates.

In theory...
YOU COULD SPEND THAT MONEY

(but you would have to spend it VERY wisely.)

HONOR, INTEGRITY, PERSERVERENCE...

these are not mere words

Wed, 07/08/2015 - 21:12 | 6288144 Tenshin Headache
Tenshin Headache's picture

Aurum

(gold)

Wed, 07/08/2015 - 20:50 | 6288073 davidalan1
davidalan1's picture
Cramer: Buy, buy, buy! Rare opportunity right now-

I shit you NOT...top story on CNBC...."he knows nothing, NOTHING" 

Wed, 07/08/2015 - 21:31 | 6288213 Realname
Realname's picture

Damn if it aint true...FU Cramer!

Wed, 07/08/2015 - 20:53 | 6288081 Soul Glow
Soul Glow's picture

Japan is getting the blunt end of the ugly stick tonight.

Wed, 07/08/2015 - 21:01 | 6288093 williambanzai7
williambanzai7's picture

Q: Why are managers electing to suspend trading?

A:  Margin call on company shares

You list some shitty company on the Shenzen exchange, wait for the crazy (chisin market) to pump the float shares then take out margin loans secured by your founder shares to buy Teslas and gold iWatches...

What can go wrong?

Wed, 07/08/2015 - 21:04 | 6288118 nmewn
nmewn's picture

Yes, now everyone see's it.

And to everyone who said "This is capitalism!" a resounding fuck you.

A capitalist (the pure capitalist) invests/RISKS his own saved earnings & profits, he doesn't rely on favorable law(s), regulations, subsidies or GOVERNMENTS help (of all fucking things) to make a return on his RISK.

Fucking burn it, burn all of it.

Wed, 07/08/2015 - 22:13 | 6288332 Apostate2
Apostate2's picture

The companies that got their shares 'protected' are the SOEs owned by the various red princelings and ubiquitous family members down to the fifth Auntie. The small-caps owned by the 90 million retail investors--who were promised blue skies by the CPC are the muppets.

Li and Xi have targets on their backs as the so-called reforms and anti-corruption campaigns have made them many enemies within the party ranks.

 

Thu, 07/09/2015 - 01:30 | 6288779 NihilistZero
NihilistZero's picture

The masses have confused capitalists with rentiers forever. One ventures in risk, the other taxes the profits from said risk. Yet the parasites in finance and banking have been able to equate themselves to Henry Ford and Thomas Edison. Most unfortunate...

Wed, 07/08/2015 - 20:58 | 6288095 nmewn
nmewn's picture

"The fun part is, they always look absolutely stunned when it slices right through the left shoulder with no end in sight...lol."-George Soros ;-)

Wed, 07/08/2015 - 20:58 | 6288096 e_goldstein
e_goldstein's picture

Okay, can we safely say that Blythe Masters destroyed civilzation with the "financial instruments" she created, or is it still too soon?

Wed, 07/08/2015 - 21:06 | 6288127 disabledvet
disabledvet's picture

It's all in "our heads"...fiat regimes.

We think "all will go one way forever"...then it goes the other.

The "one way" would appear "the Yuan will always be stronger than the dollar."

And right now this is indeed NOT TRUE.

The irony may end up being "no one believed this to be more true than the American."

We now can only "wait and see."

Wed, 07/08/2015 - 22:23 | 6288357 g speed
g speed's picture

not this American my friend--I've been saying China is broke for as long as I've been on here---just letting you know

Wed, 07/08/2015 - 21:02 | 6288110 large_wooden_badger
large_wooden_badger's picture

Asian markets looking like chum in the water for shark week. Prediction: more glitches in NY tomorrow.

Wed, 07/08/2015 - 21:04 | 6288117 Bill of Rights
Bill of Rights's picture

So when is everyone buying China?

Wed, 07/08/2015 - 21:17 | 6288164 disabledvet
disabledvet's picture

Nothing more ironic in a fiat regime of "HAVING A SHORTAGE OF YOUR OWN DOLLARS."

Wait, what?
I thought we could just print them?

Nay, veerily...we are printing DEBT not dollars.

So even in the midst of the biggest energy boom in world history...here stands the USA itself...on the verge of a MULTITUDE of defaults!

Can there be any doubt that after Detroit comes Baltimore?

None of us want to say yes to that. But here we are again..."letting the market decide."

The backdrop to this is World War Three I might add.

"This never happened in World War II" needless to say.

You can always default to hold of course. Simply FIX the price, yes?

Nay...even the USA itself wants to default to dollars.

"Not even an Abe Lincoln copper penny" can be "printed" here.
"To dear/to dear...

Wed, 07/08/2015 - 21:20 | 6288176 Pantalone
Pantalone's picture

Bai Lo

Bai Hi

Go Long

RIP

Wed, 07/08/2015 - 21:26 | 6288185 Yen Cross
Yen Cross's picture

  The bases are loaded and the "clean-up" hitter is on deck.

 

 9 min       AUD         Employment Change (Jun)           -5.0K     42.0K      
9 min       AUD         Full Employment Change (Jun)                 14.7K      
9 min       AUD         Participation Rate (Jun)           64.7%     64.7%      
9 min       AUD         Unemployment Rate (Jun)           6.1%     6.0%      
9 min       CNY         CPI (MoM) (Jun)           -0.1%     -0.2%      
9 min       CNY         CPI (YoY) (Jun)           1.3%     1.2%      
9 min       CNY         PPI (YoY) (Jun)           -4.5%     -4.6%    

* realtime chart HangSeng

 

Wed, 07/08/2015 - 21:43 | 6288255 nmewn
nmewn's picture

Hory shit...this calls for 500,000 jobs saved or created!

 

Wed, 07/08/2015 - 21:25 | 6288193 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

Crouching Tiger, Hammered Dragon.

Wed, 07/08/2015 - 21:27 | 6288199 Omega_Man
Omega_Man's picture

cancel all shorts, make them due and payable - new rule

Wed, 07/08/2015 - 21:32 | 6288219 stormsailor
stormsailor's picture

hang seng green,  it is irregal to serr so solly

Wed, 07/08/2015 - 21:34 | 6288225 stormsailor
stormsailor's picture

went red verr riki tik,  goin down, down, down, down, down down............

Wed, 07/08/2015 - 21:36 | 6288235 q99x2
q99x2's picture

Holy shit I hope my Hong Kong bitcoin accounts are ok.

Wed, 07/08/2015 - 21:40 | 6288246 nmewn
nmewn's picture

lol...I hope they don't put a halt to trading in them ;-)

Wed, 07/08/2015 - 21:47 | 6288263 BoPeople
BoPeople's picture

"The “wealth” this has created was phantom wealth – nothing has changed about the underlying businesses just because their stock prices have soared, nor has any money been destroyed because they plunged – it has merely changed hands."

This is not really true. No money necessarily changes hands when price goes up or down. (Unrealized) wealth and certainly collateral can be created and destroyed with changes in market prices. No transaction is required. Entities, such as investment banks can book profits based on mark to market accounting, but not have to pay taxes until the assets sells.

Wed, 07/08/2015 - 21:57 | 6288292 Realname
Realname's picture

The Chinese stock markets have been Panda Hammered.

Wed, 07/08/2015 - 22:08 | 6288319 foxmuldar
foxmuldar's picture

Looks like support at 3200 and then 3000. If that doesn't hold then its all over.

Wed, 07/08/2015 - 22:27 | 6288366 ljag
ljag's picture

Don't forget to stockpile those tampons for the women folk. Imagine the barter!

Wed, 07/08/2015 - 23:05 | 6288455 Spungo
Spungo's picture

I'm not sure which stats you guys are looking at. Google Finance says Hang Seng (Hong Kong) is up 3%. Shanhai is up 0.5%. Nikkei down 0.7%.

Wed, 07/08/2015 - 23:39 | 6288548 q99x2
q99x2's picture

Look on the bright side. They won't have to change the color of their wallpaper.

Thu, 07/09/2015 - 01:51 | 6288805 dojufitz
dojufitz's picture

It's ON....

 

LIKE DONKEY HONG KONG!!!!!!

Thu, 07/09/2015 - 05:09 | 6288990 Morcane
Morcane's picture

Sum Ting Wlong?

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