Over the weekend, as China scrambled to put together a coherent plan to combat the vicious equity sell-off that has pruned nearly 30% off the market’s world-beating rally, we remarked that the entire effort looked quite similar to what took place in the wake of Black Thursday some eight and a half decades ago:
“The move by the broker consortium is reminiscent of an ill-fated 1929 effort by JP Morgan and others to support the US market after Black Thursday and is, according to some, doomed to fail because i) it is a laughably small effort compared to daily turnover in China, and ii) it targets the wrong kind of stocks.”
The “consortium” refers to the 21 brokers who came together [5] on Saturday and pledged 15% of their net assets to support the flagging Chinese stock market. The PBoC later (on Sunday) announced [6] it would channel funds to the China Securities Finance Corp which will in turn use the cash to help brokerages expand their businesses and reinvigorate stocks.
The message was clear: stocks absolutely could not open red on Monday morning.
Consider the following from BofAML which shows just how imperative it was for the SHCOMP to open green: “We suspect that the initial PBoC loans to CSFC will be used on Monday morning to fund the MSF until brokers’ funds arrive (by 11am on Monday as ordered by the CSRC).”
In other words, the $20 billion or so in committed broker funds needed to be in place the second the market opened and not a minute later and if that meant the central bank had to front the money while the CSFC waited on the broker cash to clear then so be it. Here’s Bloomberg:
21 Chinese brokerages had transferred at least 128b yuan to China Securities Finance Corp. as of 11am Monday, Shanghai Securities News reports on Weibo, citing Wang Min, deputy head of Securities Association of China.
That explains the opening 8% ramp on the SHCOMP. Of course by the end of the session, whatever boost stocks received from early buying had almost entirely worn off, supporting the contention that, to quote one Bocom equity strategist who spoke to Bloomberg [7] over the weekend, “that CNY120 billion won’t last for an hour in this market.”
[8]
With all of the above in mind, we bring you the following chart which, by way of comparison with the above-mentioned JP Morgan Black Thursday plunge protection team, shows you how effective China's effort is likely to be.
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