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"The Spell Is Broken" In China, Selling Pressure To Remain "Relentless": BofAML

Tyler Durden's picture




 

Just three days ago, we outlined the series of events that ultimately led Beijing to transform China Securities Finance Corp into a half-trillion dollar, state-sponsored margin trading Frankenstein.

To recap, two weeks ago the PBoC said it was set to inject capital into China Securities Finance Corp., which is effectively a subsidiary of the China Securities Regulatory Commission. "China’s central bank is now underwriting brokerages’ margin lending businesses," we said, before driving the point home with this: "The PBoC is now in the business of financing leveraged stock buying."

Since then, the plunge protection funds channeled through the CSF have ballooned and on Friday, China’s commercial banks agreed to lend another CNY209 billion to the margin finance vehicle. All in, the CSF has around $483 billion in available funds it can use to "support" Chinese stocks. 

Amusingly, China sounded the all clear on Monday as officials claimed that "timely measures" had arrested (perhaps literally) the panic and restored "order" to the market. If "order" means the conditions which persisted prior to June, then we suppose margin trading that totals nearly 20% of the free float market cap and straight-line, limit up buying is just around the corner.

China is apparently so confident that three week’s worth of unprecedented (and comically absurd) intervention has stabilized the situation and repaired what we still contend is irreparable damage to the collective psyche of the Chinese retail investor, that the PBoC is set to wind down the CSF’s plunge protection activities just days after several commercial banks pledged billions more in support for the margin lender.

The CSRC is "studying stock stabilization fund exit plan," Bloomberg reported on Monday morning, citing Caijing. The market’s response was not favorable:

 

 

Although Chinese stocks closed green after the CSRC said it would "continue to focus on stabilizing [the] market and preventing systemic risks," it seems clear that China’s unsustainable equity bubble is ... well, rather unsustainable without explicit government support.

That of course is bad news for China in terms of its push to liberalize markets and promote the yuan in international investment and trade by projecting an air of stepped up transparency and market-based reforms. 

BofAML has more on why Beijing’s attempts to support equities will ultimately fail (note the reference to the "broken spell" which is another way of saying what we said weeks ago about the change in retail investors' mentaility) and on the negative effect intervention has on China’s international reputation. 

*  *  *

From BofAML

The A-share market may see another leg down within months

Forces holding up the market may not last long

In our view, the short-term stability in the A-share market was achieved at the expense of: 1) the government’s reform credentials and 2) the wallets of state-directed entities, including brokers, banks, insurers and the PBoC. Faced with relentless selling pressure, neither of these two can last long, in our opinion. As a result, we expect the market to experience another leg down, possibly within months

The price for the short-term market stability is heavy.

Essentially, how the government stabilized the market was by limiting selling activity and then using state-directed money to buy broadly in the market (Table 1, a detailed list of the government’s market-supporting measures since late June). At the peak, roughly half of the A-shares were suspended from trading (Chart 1) and the police heavy-handedly investigated selling activities, especially in the index futures market. Meanwhile, banks may have provided an Rmb2tr credit line, in addition to the PBoC’s lending, to the China Securities Finance Corp (CSFC) for it to buy stocks directly or indirectly. Based on media reports, CSFC had probably spent at least Rmb860bn by Jul 17 to support the market.

Reform credential is important to the government.

What happened in recent weeks has made many question the government’s reform resolve. As a result, we believe that the government’s desire to roll back the administrative controls is strong.

Given the expensive market valuation, the Prisoner’s Dilemma dictates that most state directed buyers may want to stop buying and reduce their stock exposure as soon as possible. That means that the buyer of the last resort will be the PBoC, via direct lending to the CSFC or by underwriting bank loans to the CSFC. If this practice persists for long, it may do the PBoC’s reputation irreversible damage and hurt RMB’s globalization. In addition, loans to the CSFC may crowd out bank lending in the real economy by using up their loan quotas.

Selling pressure will likely remain relentless.

Now that the spell is broken, we expect that many holders may want to sell to the forced buyers in the market. In addition, although difficult to assess accurately, due to a lack of data, we estimate that around 1/5 of the free float is still carried on margin. The high margin cost means that selling pressure is high as long as investors do not expect the market to go up significantly.

 

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Mon, 07/20/2015 - 20:48 | 6334950 Supernova Born
Supernova Born's picture

The spell of greed can never be broken, it is rerentress.

Mon, 07/20/2015 - 20:52 | 6335072 Fahque Imuhnutjahb
Fahque Imuhnutjahb's picture

Wee Lous Doe

Mon, 07/20/2015 - 21:22 | 6335181 Lets Buy The Dip
Lets Buy The Dip's picture

its true, maybe there is money coming out of CHINA and into other stuff. 

Think this is not correct, well, what about What about yesterday, GOOGLE had the biggest 1 day up in history. HOLY MOLEY! 

someone knew something!? See the chart==>   http://bit.ly/1CSC7Rq

Does this remind anyone of the tech boom back in 1999 – 2000? hmmmm?

I remember seeing on the ACA accurent affairs show, farmers who were quitting their jobs in the field, they set up computers hooked up to the internet in teh main street and were trading stocks in teh street with like $3,000 USD. One girl had put $6000 USD on the stock market in china and she made $40,000 USD and now she has about $1000 USD left. Oh dear. Crazy stuff. 

These guys thought the FUN would NEVER END!

Mon, 07/20/2015 - 20:20 | 6334972 nmewn
nmewn's picture

Fucking dumbass Chi-Coms, just pass a law REQUIRING the peeps buy shit.

Like ObamaCare.

Mon, 07/20/2015 - 20:24 | 6334987 stant
stant's picture

When buying stawks many problem , when no can sell stawks only one problem

Mon, 07/20/2015 - 20:31 | 6335012 nmewn
nmewn's picture

Marxist Lesson in Life #24: Communism/socialism and corruption, greed & power lust are not mutually exclusive.

See Hillary! ;-)

Mon, 07/20/2015 - 20:35 | 6335025 stant
stant's picture

You no get ,read memo , round eye

Mon, 07/20/2015 - 20:38 | 6335034 nmewn
nmewn's picture

The memo kept in a locked room no one can copy, read aloud or take notes on under penalty of law...like TPP?

Mon, 07/20/2015 - 20:44 | 6335045 stant
stant's picture

Yep

Mon, 07/20/2015 - 21:00 | 6335097 Omega_Man
Omega_Man's picture

Lesson 3. Rule by Communism/Capitalism - no difference as long as you control the money supply and the politicians.

When fiat collapses Capitalism and can no longer suit the purpose, no problem, just turn it into a communist state. You are still on the throne. 

 

Don't forget to eat babies. 

Mon, 07/20/2015 - 21:09 | 6335132 nmewn
nmewn's picture

So, no love for Chinese central bankers creating fiat from thin air while enriching themselves & their cronies then.

Good, you're learning grasshopper ;-)

Mon, 07/20/2015 - 20:26 | 6334992 slicker
slicker's picture

"Possibly within months"????  That tells me nothing. In today's markets that's an eternity.  Possibly within months implies that it might be longer, like years.

Go do something useful.

Mon, 07/20/2015 - 20:33 | 6335019 steveharless
steveharless's picture

I wish the chinese would just come to vegas and buy a boat load of properties

www.ViewLasVegasRealEstate.com

Mon, 07/20/2015 - 21:25 | 6335196 Mentaliusanything
Mentaliusanything's picture

Son If thats your full stock list I would advise a second job... pronto

Mon, 07/20/2015 - 20:37 | 6335033 Omega_Man
Omega_Man's picture

Sell US treasuries and buy stawks and gold. 

Mon, 07/20/2015 - 20:44 | 6335038 Omega_Man
Omega_Man's picture

I love china

Mon, 07/20/2015 - 20:46 | 6335053 nmewn
nmewn's picture

You shoulda kept the Ashley Madison reference, it had moar appeal.

Mon, 07/20/2015 - 20:53 | 6335075 Omega_Man
Omega_Man's picture

yes we know the truth, but didn't want to have to fight off Hasbara this evening

Mon, 07/20/2015 - 21:01 | 6335108 disabledvet
disabledvet's picture

Dead but true.

Forget "basis trading"...when the price of gold collapses what doesn't collapse with it?

Gold has never shines brighter...nor WEIGHED HEAVIER...than it is doing right now.

Stay out of the debt markets folks...the Silver Surfer has suddenly appeared.

Mon, 07/20/2015 - 21:04 | 6335117 nmewn
nmewn's picture

Don't be so weak, as Confucian Hasbara always say: "Kill the short seller! He defy the Magnificent State! He take your EBT and drink the blood of your starving cheeeldrun!"...lol.

Mon, 07/20/2015 - 21:24 | 6335193 Antifaschistische
Antifaschistische's picture

100 families pay 100,000 for homes in a new neighborhood.

1 dude comes along the next month and pays 120,000 for one of the homes.

1 dude comes along the next month and pays 150,000 for one of the homes.

98 families are so happy with their perceived 50% appreciation...they have parties, barbeques, borrow money for the kitchen remodel, dig a hole called a pool they never use, buy a new car, drop a 1000 on fireworks at new years and take a cheesy cruise to Cancun, etc...

but, reality always happens.

5 people decide...hey, we want to cash in on our 50% appreciation.  When they do, the home prices drop to 120,000.   Worried that they will only break even 10 more sellers jump in before they are upside down....and before you know it, the homes in the neighborhood are selling for 75,000 each.

This exact phenomenon happens in every bubble, or ponzi, or whatever you decide to call it, everywhere in the world.

How about this for a hypothesis.

The Chinese market is crashing because Chinese people are SMART and they realize they're in a bursting bubble and they're trying to cash out.   Will American's be so smart when bubble start bursting here?   Not bloody likely...

 

Mon, 07/20/2015 - 21:31 | 6335217 Antifaschistische
Antifaschistische's picture

one more thing for those of you who aren't intimately familiar with Chinese.  There's a big difference between Chiense people and Americans.

Chinese people do NOT trust their government.  So when their government tells them something they will instinctively (often) assume something contrary.

Americans are the sheep who herd mindlessly along, swallowing up our Central Planner bullshit and taking all our investment advice from MSM.

 

Mon, 07/20/2015 - 21:49 | 6335300 nmewn
nmewn's picture

Communist/socialist lesson #1: See Great Leap Forward!

18 to 45 million dead is kinda of a teachable moment, for the enlightened.

Tue, 07/21/2015 - 16:28 | 6338571 GoldSilverBitcoinBug
GoldSilverBitcoinBug's picture

Ho many Native Indian where killed you freedumb loving Americans ?

Tue, 07/21/2015 - 07:16 | 6336228 GoldSilverBitcoinBug
GoldSilverBitcoinBug's picture

They may not trust the government (you can even criticize him in private) but Chinese are extremely Nationalist and proud of their country (things that Westerners have forgotten or worse shamed if they do that).

Source ? My Chinese GF (yeah, a red piller can have a GF and even a wife, Red Pill is just about hedging yourself with women...)

Mon, 07/20/2015 - 20:57 | 6335090 bid the soldier...
bid the soldiers shoot's picture

Confucius say

ZH writer with ax to grind be careful not to chop off his own pecker 

The PBOC in 2015 did nothing in China's stock markets that even compares to the criminal manipulation of the Fed in 2009.

 

And to quote BoAML's opinion on the subject is ludicrous. Two entities, now one, that would be floating with the turds in sewers of Wall Street if not for the fraudulent, unlawful behavior of our central bank.   

Mon, 07/20/2015 - 20:58 | 6335094 razorthin
razorthin's picture

Should the Fed and IMF be able to keep Western markets afloat in the wake of this Chinese Tsunami, it will be uterly amazing.  It will also increase the misery index such that an innumerable pichforks shall be borne and torches lit.

Mon, 07/20/2015 - 20:59 | 6335098 biggestbrother
biggestbrother's picture

THE BIGGEST BET IN HISTORY 

 

Is on whether China will get Reserve currency status a the IMF meeting in OCTOBER

 

They have been busy buying votes of the more corruptible countries - including Australia. 

The logic is that they are not ready. 

 

But when did corrupt IMF ever let what is right get in the way of big graft.

 

GOLDMAN is against it.  WATCH THEIR PRESS.  They have a bet each way but bigger against.

Mon, 07/20/2015 - 21:01 | 6335110 Omega_Man
Omega_Man's picture

Donald's hair is looking much better tonite.

Mon, 07/20/2015 - 21:09 | 6335134 nmewn
nmewn's picture

lol

Mon, 07/20/2015 - 21:36 | 6335240 Omega_Man
Omega_Man's picture

Perhaps Obama's numbers will go up to 24% if he gets a muff like Donald

Mon, 07/20/2015 - 21:13 | 6335146 cowdiddly
cowdiddly's picture

An you would prefer the fake rug look of Timmah or Kerry? Heck, lets bring back the Powdered wigs so all these clown look like what the are.

Mon, 07/20/2015 - 21:18 | 6335166 red1chief
red1chief's picture

It'll hurt the PBOC reputation only if there is not a big rally. Similar tactics have not affected the Fed...

Tue, 07/21/2015 - 01:06 | 6335870 laomei
laomei's picture

Here's how you know that some serious money is coming out of the market.

Pretty much ALL of the wealth management products are sold the fuck out.  starting at 20? 50? 100? 1000w for minimum investment? all gone.  Offers of 6% all the way down to 3.5%... gone, sold out the instant they open the gates.  35 days? sold out.  2 years? sold out.  Home prices are going up some too again. People turning stocks into real estate.

 

Sure, some lost out big in the end, and they are dumping some homes for a song to pay off debts, but it's really not a big deal.  Good for me, I'm looking to swap some property around and one of my targets is going down in price from this, albeit longterm it will be going up due to location location location.

Tue, 07/21/2015 - 03:55 | 6336057 Batman11
Batman11's picture

While the bubble is inflating people get the true joy of Capitalism.

Making money while doing nothing.

 

Markets are irrational and have been since Tulip Mania in 1600's Holland.

Do not look for rational explanations, the prospect of easy money turns human beings into gibbering idiots.

 

Stocks, house prices, <yet another asset type> are going up in value.

I have heard of someone who has made lots of money, I want in.

I am making money, I need to borrow money to carry on investing and make more money.

Gibber, gibber, gibber ....................................

The bubbles burst; I am going to be ruined.

No more gibbering, till next time.

 

 

Tulip bulbs ...... gibber  ....... the new internet .... gibber .... sub-prime ..... gibber .....  property ..... gibber ..... social media  ..... gibber ..... Apple .... gibber ..... pharmaceuticals .... gibber .... emerging markets .... gibber ..... silicon valley start-ups ...... gibber ..... gibber  gibber  gibber  gibber

 

Tue, 07/21/2015 - 07:21 | 6336231 GoldSilverBitcoinBug
GoldSilverBitcoinBug's picture

What's wrong with a stock-market crashing after a bubble unlike in US when the FED try to prop up the DOW and SP desperately ?

You know, the Chinese government could have print into oblivion but they haven't done it or it's insignificant.

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