Fear Trumps Greed As Chinese Stock Bubble Canary In The Coalmine Croaks

Chinese stocks had a tough night with CHINEXT dropping back into official correction once again and the rest of the Chinese stock euphoria fading systemically. In fact, Chinese stocks have gone nowhere in the last month - which is a major problem for a margin-loan-driven ponzi-fest. However, there is a much more worrying canary in China's coalmine which as one analyst warns means "investors are becoming more fearful than greedy." The "No-Brainer" China IPO Trade has tumbled in the last few weeks as limit-up gains disappear, and is nearing a bear market.

Overnight was weak...


But China has gone nowhere in a month...



As the "no brainer" trade dies... The IPO index is down 18 from its intraday highs...

As Bloomberg reports,

A limit-up gain of 44 percent on opening day was all but guaranteed, thanks to regulatory pressure on companies to keep offering prices low, and it didn’t stop there. Half of the initial public offerings this year through mid-May jumped more than 300 percent in their first month.


Now, those can’t-lose bets are looking vulnerable. The Bloomberg China IPO Index dropped 18 percent from its high on May 27 through Wednesday, while all 10 of this month’s worst-performing companies in the benchmark Shanghai Composite Index are IPOs from the class of 2015.




“Investors are becoming more fearful than greedy,” said Chen Xingdong, the chief economist and head of macro-economics research at BNP in Beijing. “Stock prices have gone too high despite weak economic growth.”

Of course, there is always hope...

“This game is not over yet,” said Steve Wang, the chief China economist at Reorient Financial Markets Ltd. in Hong Kong. “People will return to it as market conditions improve.”

But we leave it to Norman Chan, an investment director at NAB Private Wealth Advisory to conclude...

“The valuation is becoming less and less sustainable, Further upside is limited."

As we noted previously,

“If margin loan growth starts to decelerate notably, the market will slow down. If non-compliant margin lending accounts must be closed, the market will crash.”



The China Securities Regulatory Commission is planning to curb the amount of margin finance and short selling to no more than four times a brokerage’s net capital, according to draft rules posted on its website June 12. There is currently no ceiling. The CSRC is also considering allowing brokerages to roll over margin trading and short-selling contracts, instead of closing them out after six months, which may quell volatility if the rally falters.


“Guiding markets like this with regulatory measures is incredibly hard to do,” said Michael Every, the head of financial markets research at Rabobank International in Hong Kong.

China’s stock-market tumble of 2008 shows how quickly investor confidence can evaporate, even in the absence of margin calls. The Shanghai Composite fell more than 70 percent in the 10 months ended Nov. 4, 2008, after jumping more than 400 percent in the previous two years. However, some confidently see no hiccups...

Leveraged investors have made so much money from rising stock prices that it would take a “big market slump” for them to start unwinding positions, said Yuliang Chang, the Hong Kong-based head of Chinese equities at Deutsche Bank AG.


"There are ample buffers given how much A shares have rallied,” Chang said.

But, as Bloomberg concludes, brokerages across China are already tightening requirements for lending to stock investors to try to limit their exposure to any market bust. GF Securities Co., Haitong Securities Co. and Changjiang Securities Co. have all raised margin requirements.

For leveraged investors who get caught in the next downturn, the losses may erode their faith in the stock market, said Neoh.


“A lot of people will lose money,” he said. “And it would be a long time before they will return to the markets.”

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