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Chinese Stocks To Plunge Another 35%, BofA Says
On Monday and Tuesday, China’s plunge protection team attempted to step out of the market. The result: a 15% decline on the SHCOMP, the shockwaves from which reverberated in equity markets across the globe.
After Wednesday’s ad hoc policy rate cuts failed to shore up sentiment, the PBoC was forced to come face to face with the harsh reality that massive capital markets intervention is very difficult to unwind once implemented and indeed, China isn’t alone in grappling with the rather undesirable consequences of pulling back central bank support for markets.
Rather than watch as the SHCOMP crashed through key level after key level, China looks to have stepped back into the market on Thursday and again on Friday in a desperate attempt to restore order ahead of a military parade next month which Beijing apparently sees as an opportunity for Xi Jinping to project the country's growing power to the rest of the world.
Here is a quick summary of the last week seen through the perspective of Chinese stocks.
- Aug 20: -3.4%
- Aug 21: -4.3%
- Aug 24: -8.5%
- Aug 25: -7.6%
- Aug 26: -1.3%
- Aug 27: 5.3%
- Aug 28: 4.8%
But as is the case with the PBoC’s open FX interventions, some doubt how long China will be willing to spend money to prop up stocks and at least one analyst thinks that Chinese equities are in for further dramatic declines in the absence of the CSF bid. Here’s more from Bloomberg:
The rebound in China’s stocks will be short-lived because state intervention is too costly to continue and valuations aren’t justified given the slowing economy, says Bank of America Corp.
“As soon as people sense the government is withdrawing from direct intervention, there will be lots of investors starting to dump stocks again,” said David Cui, China equity strategist at Bank of America in Singapore. The Shanghai Composite Index needs to fall another 35 percent before shares become attractive, he said.
The Shanghai gauge rallied for a second day on Friday amid speculation authorities were supporting equities before a World War II victory parade next week that will showcase China’s military might. The government resumed intervention in stocks on Thursday to halt the biggest selloff since 1996, according to people familiar with the matter.
China Securities Finance Corp., the state agency tasked with supporting share prices, will probably end direct market purchases within the next month or two, Cui said.
Be that as it may, it doesn’t look like CSF intends to go down without a fight - it’s either that, or the plunge protection team is looking to go out in a blaze of market-manipulating glory, because overnight, Caixin reported that the vehicle looks to have applied for around CNY1.4 trillion in new loans from banks. On the bright side, we suppose that means China will be able to report blockbuster credit growth in August or else in September, just as they did in July, thanks to the fact that loans to the plunge protection team are counted as though they represented real, organic demand for credit.
If CSF does indeed exit the market after one final trillion-yuan buying spree, it looks like next in line to prop up Chinese equities will be China’s pension fund assets, as much as 30% of are set to be funneled into stocks. Here’s The People’s Daily will the Party line:
Some 2 trillion yuan pension fund could be invested in domestic stock market, an official estimates in a press conference in Bejing Friday.
Pension fund is allowed to be invested in new products, including domestic stock markets,but restricts the maximum proportion of investments in stocks and equities to 30 percent of total net assets.
Deputy Finance Minister Yu Weiping said that China will start investing of the pension fund after collection. Currently China is drafting regulations on pension collection and transfer.
China is capable to ensure long-term stable returns and will control the risk associated with the pension fund investment, says You Jun, Deputy Minister of Human Resources and Social Security.
You Jun estimates some 2 trillion yuan pension fund could be invested in domestic stock market. The role of the investment is not to support the stock market, or to rescure [sic] it.
Yes, the point is not "to support the market" and definitely not to "rescure it", it’s just China taking a hard look at its pension fund investments and making smart decisions about how to allocate capital - or something.
But whatever the case - and the fact that stock market interventions are correlated with public spectacles like military parades is proof positive of this - Beijing is clearly aware that allowing the market to collapse completely would deal a death blow to the public's already shaken belief in the omnipotence of the Politburo and that is a completely unacceptable outcome. At the end of the day, the masses must be appeased and, more importantly, they must be pacified and if spending a few trillion yuan is what it takes to acheive that, then so be it, and after the two-day rally everything is fine... for now at least...
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Flied wice........................all round
flied lice. i should know, i worked at a chinee westawant. lulz
Buy PMs......I'm not going to warn you again.
My job is done here.
Did so yesterday. Anyone else notice the 40% premium on junk sliver going on out there? A $100 face value bag that should go for around a little more than $1000 is going for $1450. That's a pretty steep mark up. Bullion had the normal 5 to 8%.
As soon as Langley can arrange it.
Arrest BofA. Or at least, ban them from trading like Citadel.
Truth is treason in a fascist, police state
China Pension funds to recue.................Stawks
USA pension fund to rescue...................Government debt
Who above is for the peeple?
Hmmm..................makes you think about the burden of DEBT
The article seems to be premised on rational decisions and efficient markets. Saying the Chinese market would become attractive for new or additional investment if it was 35% cheaper (ceteris paribus) is not quite the same as saying it will actually drop 35% more before bottoming in this centrally and externally manipulated (somewhat great) game they call a "market".
+1, UR. It's BofA. Just read what they wrote about the EUR, in the last 8 years, and compare with what really happened
Urban, what do you think about going long US stocks and shorting chinese stocks? Hopefully short chinese stocks on up moves while buying US stocks on down moves?
As a hedge it's inefficient and pushing the limits of what could be construed as synthetic. I'd stick to something with stronger correlation like JPY. But the lack of transparency in China troubles me, versus the Devil I Know at Marriner Eccles. The narrative about China dumping UST doesn't entirely fit and appears to be a suspiciously convenient explanation... so I'd be hesitant to bet against a house with both a printing press and several trillion of liquidity in AUM. As a pure risk/unhedged play, China's move would seem to open the door to finally shorting UST, but I don't think we're quite there yet because I didn't see institutional fear this week driving money into bonds.
Thank you, I guess I will continue to stick more heavily with my long S&P strategy for now...
Armstrong's Commodore 64 and me are about 250 points apart on the short term pivot (my last calculation was EOD Wednesday), with similar medium term outlooks and completely different methodologies (since I'm not going "there" on a long enough timeline).
It's interesting that his machine is easier to understand than he is....
http://www.armstrongeconomics.com/archives/36630
You are funny, but yes, it looks and sound like a commodore 64. Agreed, the greek guy (socrates) is easier to understand.
Thanks again, Armstrong is a treasure.
FEES drive life.
What happens on the day after QE4 is announced?
Will stocks keep climbing into the abyss?
To go where no man has gone before?
This is how the scientists expect the universe to end.
To pull itself apart until it doesn't exist anymore.
None of the scientists know why the universe is expanding faster either.
I think when QE4 is announced -- you'll have the market explode, like it has the past few times.
We gotta have that deflation first tho.
Then what happens?
things. lots of them
of course it will. they coordinate QEs with market maniuplation. try to understand, there is NO MARKET.
QE4 announce will have minimal and VERY short lived pop, if any
Then market will plunge
Because what it really does it expose the truth that the Fed has screwed the pooch
A dump like a country s**t. Took one this morning and had to use the plunger afterwards.
The reason why there's final intervention, it's to give space for retail speculators last chance to exist, after the military parade, it could come down as the real correction would begin.
We watch our military parades on teevee while they invade and demolish countries full of brown people. The explosions are freaking awesome!
https://www.youtube.com/watch?v=dDw-zFFhFgc
FASCISM. FUCK YEAH!
Wonder if BofA has ever said that US stocks are 10% overvalued let alone 35% as they say about China. US big banks are just an arm of the US government.
Buy calls above a 50 period moving average
Buy puts below that 50 MA
BUY BOTH IF YOU ARE NOT SURE AND LET THE WINNER RIDE! Cut the loser.
Let price tell you where it is going. THEY CANNOT HIDE OR MANIPULATE THIS REALITY.
They can front run and whipsaw....so move to a next higher time frame to clean it up.
I have been to China twice: once as a business man in 1994 and second as a politician in 2009. They take the long trem view of any situation and I agree with the author that they will let the market fail. They have been advising their citizens for ten years to buy gold as a form of financial stability. What they do next will be interesting but if I was to make a bet it will be about moving to a gold back currency after they have sold all their greenbacks.
Just sayin" -- thtat's my guess.
Did you buy a T-shirt on both occasions?
poon tang's cheaper
Is it like in the US where the banks hold the government hostage? The banks control price and say: "give us a big payout by buying stocks at this high level from us or else we will allow actual market forces to take hold and prices will crash"?
The prices will crash because there is no economic return on investment model that justifies high prices above the rate of return. Since most stocks, especially in tech have a zero rate of return (other than through controlled and manipulated price distortion), the prices are artificially held up and held hostage.
Typically people are clueless, have other people managing their money/retirement funds and are just following the herd. Those who understand value are at a disadvantage under the typical bank controlled circumstances.
USA stawks will plunge 40% according to many so the Chinese are going to beat us?!
I like the Chinese. When they lose faith in their government and are taken to the cleaners - they don't have a problem grabbing the nearest politician and literally beating the shit out of him. In the U.S. - we're all about non-violence and complacency - we accept whatever our institutions and government does to us.
the chinese are one culture --they trust each other--the USA on the other hand is multicultural and none trust the other---so if your in china and the people move they move as one---in the USA its every man against the state by himself--- it's by design----
How much money did BoA made up and down the Chinese roller coaster? Suddenly the financial community have procured all the wisdom in a "what's under my pillow? Ben, did you do it?" moment. Is there a bottom to this moral abyss?
35%?
That's it?
Once the ball starts rolling, it will be hard to stop
And it's not just an Asian problem
Wait until the sheep find out propping up the US markets can't go on forever either
I seem to remember DOW being around 6000 and something before Fed intervention
I won't just be yu weeping.
The Chinese stock market is a frickin mess. It is most certainly the Wild Wild West of the 2000's. There is no place on the planet with more institutionalized corruption than the Chinese stock market. Ordinary people, with no money, start shell companies, take them public, and end up billionaires overnight. No company, no product, no customers, nothing, and they can go public, steal and run away to Canada or Australia or the USA.
Who wants to invest in that? Its learning well from the second most corrupt market, the USA, where high frequency trading hedge funds pay congress to shut up, and they continue to steal from us daily.
"On a long enough timeline, the survival rate for everyone and every thing is zero."