This was not supposed to happen.
After pledging, investing and otherwise guaranteeing the Chinese stock market to the tune of 10% of GDP [11], and intervening on at least 40 different occasions in the past month ever since China's stock bubble burst in late June, with the subsequent crash nearly taking the Shanghai Composite red for the year, overnight China officially lost control for the second time, when after a weak start to the Monday trading session, things turned very ugly in the last hour, when the Shanghai Composite plunged by 8.48%, closing nearly at the lows, and tumbling some 345 points for its biggest one-day drop since February 2007 and its second biggest crash in history!
[12]
The selling was steady throughout the day, but spiked in the last hour on concerns China would rein in its market-supporting programs following IMF demands to normalize its relentless market intervention. According to Bloomberg's Richard Breslow: "fear that the extraordinary support measures employed to hold up the market may be scaled back caused heavy afternoon selling resulting in a down 8.5% day." Of course, one can come up with any number of theories to explain the plunge: for example the PBOC did not buy enough to offset the relentless selling.
[13]
The last thing the communist party and the PBOC wanted was another massive sell off after having not only fired the "bazooka" but come up with a different bazooka to halt "malicious sellers" virtually every day, including threats of arrest.
[14]
Nobody was spared in the selloff and of the 1,114 stocks in the Shanghai Composite, 13 closed higher on Monday.
Here, courtesy of the WSJ [15], are some of the more amazing numbers of today's selloff:
- The Shanghai Composite Index ended down 8.5% at 3725.56, its second-straight day of losses and worst daily percentage fall since February 27, 2007. The smaller Shenzhen Composite fell 7% to 2160.09 and the ChiNext, composed of small-cap stocks and sometimes known as China’s Nasdaq, closed 7.4% lower at 2683.45.
- More than two-thirds of the stocks in the Shanghai Composite, or about 765 companies, hit their down limit on Monday. Those limits prevented hundreds of stocks from logging sharper declines, though they can also make it harder for investors to exit positions.
- Since the Shanghai Composite peaked in June, it has lost 28% of its
value. Massive intervention by authorities in Beijing engineered a
rebound for the country’s stock markets earlier this month, but Monday’s
selloff eroded much of that recovery. - Although hundreds of stocks have resumed trading since the market bottomed earlier this month, 126 stocks on the Shanghai Composite are still halted.
- International investors have been ditching Chinese stocks for the past few weeks, spooked by widespread share suspensions that locked up capital. Investors sold stocks during 13 of the past 16 trading sessions via the Shanghai-Hong Kong Stock Connect, a trading link connecting the two cities that launched in November. Cumulative outflows now total 39.9 billion yuan, or U.S. $6.43 billion.
According to Reuters [16], there was little to explain the scale of the sell-off. Some analysts said fears that China may hold off from further loosening of monetary policy had contributed to souring investor sentiment.
Sure enough, narratives to "explain" the selling which beget more selling, were promptly offered, as can be seen in this Bloomberg summary of aftter the fact research reports;
NORTHEAST SECURITIES
- “The decline, extending losses on Friday, is a technical correction after hundreds of companies rebounded 50% with dozens of stocks even doubling after the sell-off,” analyst Shen Zhengyang says by phone
- “The rebound from the earlier sell-off has pretty much come to an end and the market needs to take a breather”
- Possible expansion of yuan band may put the currency under depreciation pressure, while pick-up in home prices in 1st- tier cities may mean weaker-than-expected monetary easing policies going forward
- Mkt might enter range-bound consolidation after technical correction, but upside will be limited as investor confidence was shattered in earlier sell-off
CHINA SOUTHERN FUND
- Mkt slumps due to “fragile” investment sentiment, investors locking in profit from previous rebound: chief strategist Yang Delong says in phone interview
- A shares extend decline as investors started to take profit from last Friday after recent mkt rebound
- Investors lose faith in a longer-term rebound
- Expects China to roll out more measures to boost A shrs if SHCOMP drops below 3,800
- Govt backed funds, with big enough war chest, may buy stocks after mkt slump today
SHENWAN HONGYUAN GROUP
- Pullback today mainly due to profit-taking, while news on possible govt exit of mkt rescue also has impact on mkt: analyst Qian Qimin
- Weakness in heavyweight stks may lead to “double dip” in mkt, sees “policy bottom” at 3,500 points as index below that level may trigger panic again
- Fundamentals underpinning bull mkt may have disappeared given low probability in further monetary easing, potential investment shifting to property mkt, more cautious mkt sentiment
SINOLINK SECURITIES
- A share slump today is an “aftershock” as mkt sentiment needs longer time to recover from previous mkt correction: analyst Huang Cendong
We agree with one thing: having gone all in, the Chinese government can't stop now, and after pledging half a trillion for its Plunge Protection Team (recall China skipped all the QE pleasantries and proceeded straight to buying stocks, launching a quasi-nationalization of the market and making the China Securities Finance Corp a Top 10 shareholder of numerous stocks [17]), it will be forced to do even more, in the process crushing confidence that much more, since investors both offshore and domestic, realize that the fair value of stocks is far lower than current price ex. government intervention.
"Investors are not confident that the bull market will return any time soon," Jimmy Zuo, a trader at Guosen Securities, told Bloomberg.
"People want to pocket profits after the benchmark index rose past the 4,000 mark."
And who can blame them? The only question we have is when will people in other "developed" markets wake up to their own just as manipulated markets, and decide they too have had enough with the rigged casino.
Actually, there is another question: the last time Chinese stocks had a near-record crash, the PBOC somehow "discovered" 600 tons of gold hiding under the couch to prop up confidence. We wonder how much it will "discover" this time.
