Yesterday, we had a feeling that China would finally do something to arrest the collapse in its local stocks...
HK stocks will rip higher— zerohedge (@zerohedge) March 15, 2022
... and little did we know that just a few hours later we would see the biggest surge in Hong Kong stock history, coupled with a furious surge in China's CSI300.
Two days after we said that JPM's call that Chinese internet stock are uninvestable and that the bank's wholesale downgrade of Chinese tech would mark the bottom...
Wholesale capitulation. Time to buy pic.twitter.com/eS0xc7vtTD— zerohedge (@zerohedge) March 14, 2022
... not even we had any idea what would happen last then 48 hours later, because after a brutal year for Chinese stocks, on Wednesday long-suffering China bulls finally got their long-awaited payday.
The Wednesday session was looking like a tepid bounce off multi-year lows until the headlines started rolling from Beijing... that's when everything exploded.
In a brief statement carried by state media, China’s top financial policy body vowed to ensure stability in capital markets, support overseas stock listings, resolve risks around property developers and complete the crackdown on Big Tech "as soon as possible." In short, China vowed to make everything better again.
Yi Gang, governor of the People’s Bank of China, followed with a statement on the PBOC website, saying the central bank would help implement the policies, adding that he held a meeting Wednesday noon to study implementation of the State Council’s promises including keeping the capital market stable.
While the pledges from President Xi Jinping’s government offered little clarity over what authorities may do to achieve their goals, it was the first time China publicly addressed investors’ top concerns in one coordinated swoop. The move underscored Xi’s focus on ensuring economic and financial stability before a Communist Party congress at which he’s expected to secure at least another five years in power.
In any case, Beijing's explicit backstop guarantee led to an epic market meltup and short squeeze, and by the time trading ended just after 4 p.m. local time on Wednesday, the Hang Seng China Enterprises Index was up 12.5% in its best session since October 2008.
Alibaba Group Holding Ltd. surged 27%, while JD.com Inc. jumped 36%. Property stocks rallied the most in more than a decade. The Hang Seng Tech index jumped by 22%, the most ever...
... while China's benchmark CSI300 index rose the most intraday since July 2020 after having lost as much as 1% in the morning session. It plunged more than 7% in the previous two days.
The euphoria carried over to the US premarket where Alibaba and US-listed Chinese ADRs soared in a mirror move: some of the most notable premarket movers included Alibaba +20%, Didi +37%, Pinduoduo +25%, Baidu +14.
“It’s the end of capitulation,” said Peter Garnry, head of equity and quantitative strategy at Saxo Bank. “This confirms that the Chinese government sees healthy and strong equity markets as key for the country going forward. The equity market is totally sentiment driven right now and everyone is looking for an excuse to buy, though the headwinds for Chinese equities are still enormous.”
“Usually the market’s natural bottom comes after the policy bottom, which we are seeing now,” says Li Weiqing, fund manager at JH Investment Management Co. “This time around things may be different, as the rout was looking like a financial crisis; the macro figures are also pointing to a bottom. But even if this is not the end, we can at least expect more stability in the next week or so”
As we noted earlier this week, the need for Beijing to do something was growing more urgent with every passing day as stocks slumped lower and lower, threatening systemic stability. Global confidence in Chinese financial markets was by some metrics the weakest since the financial crisis in 2008, with stocks cratering on Monday by the most since the Lehman failure, while a relentless plunge in credit and record outflows from government bonds undermined the currency’s strength.
Xi also faced more political pressure to bolster the economy, with rising Covid cases spurring lockdowns that threaten to hinder growth and disrupt life for millions of people. The State Council statement made a veiled reference to his political imperatives, calling on all parties “to deeply understand the significance of the “‘two establishes’” in keeping the economy and markets stable -- jargon that affirms Xi’s position as the Communist Party’s most important figure.
Government departments should “actively introduce policies that benefit markets,” according to a meeting of the Financial Stability and Development Committee, led by Vice Premier Liu He, who’s in charge of overall economic policy.
China also said it supports firms listing overseas and has achieved positive progress in discussions with Washington over Chinese stocks on U.S. exchanges, Xinhua’s report of the meeting said, adding that both sides are working to formulate a detailed cooperation plan. Concern that companies like Alibaba might need to delist from overseas markets had been a major driver of the selloff in recent days; the news will see the stocks double or triple on short notice.
The equity slump began last year in large part because of policies introduced by Beijing, including crackdowns on tech firms and property developers. More recently investors had started to brace for worst-case scenarios like sanctions against China for its perceived support of Russia. It all came at a time of increased market turmoil globally with Russia on the brink of a default and the Federal Reserve set to raise interest rates.
AS discussed on Monday, the pace of selling in China had been savage: the Hang Seng China gauge plunged 24% this month through Tuesday. The drawdown Golden Dragon China Index recently surpassed the drop observed during the Lehman collapse.
Even after Wednesday’s surge, the index is down about 40% in the past year, the worst performance globally. Chinese stocks in the U.S. have lost 75% from their 2021 peak, while the yield on Chinese junk dollar debt has surged above 27% for the first time.
The yuan has also started to look vulnerable. Selling momentum in the offshore Chinese currency on Monday reached an intensity only seen a handful of times in the past five years. The yuan suffered the biggest real-money net outflows among all global emerging-market currencies last week, according to Citigroup calculations based on client trades, Bloomberg reported.
Naturally, a short squeeze likely exacerbated the gains. Short selling comprised about a quarter of Hong Kong’s total daily turnover on Monday and Tuesday. Such speculators traded more than 10 million Tencent shares on Monday, the most in more than a year.
Of course, sparking a short squeeze is one thing, extending the move is another and for Wednesday’s rally to continue, China’s policy makers will need to follow through with actions. Promises to keep markets stable were vocalized in January by the securities regulator, which has made no known intervention since. Assurances of dialog with the U.S. regarding the auditing Chinese ADRs have been made before. The easing of funding rules for property firms have so far been incremental.
The rally’s staying power will also depend on the reaction of foreign investors, whose role in Chinese markets has never been so important. Between the start of 2019 and the end of 2021, overseas holdings of local stocks increased by more than 242% to 3.9 trillion yuan ($613 billion). Inflows into the nation’s bond market rose by 129% to 4.1 trillion yuan.
In any case, a heavy-handed approach to managing market swings can backfire, like it did for China after a stock bubble burst in 2015, when botched interventions helped accelerate selling. The CSI 300 didn’t recover its 2015 high until five years later.
“I do not believe this is a turning point -- we are in a very turbulent period,” said Sean Debow, chief executive officer of Eurizon Capital Asia. “In order to catch a falling knife you have to have very very strong conviction, and we don’t have that yet.”
The bottom line is that for China to truly see a bounce in stock, it will need to engage in massive stimulus despite Beijing's well-known atavism to doing just that with China's economy already at record debt levels. However, at the end of the day, when picking between a social crisis and "just a little more debt", China will always pick the latter.
And now that Chinese stocks are fixed - if only for now - we look forward to Jerome Powell who today is set to take a first step in the opposite direction, and instead of propping up stocks, the Fed chair will hike rates for the first time since Dec 2018. We wonder how long before he too is forced to pull a China to bail out the precious, precious stocks...