Volatility, Confusion Reign As PBoC Intervenes: Chinese Stocks Surge Then Tumble

"Rainbows always appear after rains," China's state media said over the weekend, in a blatant attempt to create the conditions for a self-fulfilling prophecy when the country's battered equity markets opened for trading on Monday. 

China's brokers and mutual funds each took steps on Saturday to help stabilize the market which has collapsed 30% in just three weeks, thanks in part to a massive unwind in the shadowy world of backdoor margin lending.

On Sunday, the China Securities Regulatory Commission announced that China’s central bank is set to inject capital into China Securities Finance Corp which will in turn use the funds to help brokerages expand their businesses and reinvigorate stocks. Translation: China’s central bank is now underwriting brokers’ margin lending businesses. 

Now, the trading week is officially underway and the above-cited "rainbow" thesis is being put to the test early and often as panicked housewives and banana vendors looking to sell the rips battle the PBoC for control of an insanely volatile market.

As we noted earlier, it may now be too late to resurrect the bubble because the psychology has changed irreparably: "I didn't sell at the peak because people all say the market will rise beyond 6,000 points," Shao Qinglong, a public service worker who has already lost over a quarter of his capital investing in stocks, told Reuters, adding that all he is waiting for is for the market to recover enough for him to break even. "I'm now waiting for the market to rebound so that I can get out."

True to form, the SHCOMP opened sharply higher in a bout of post-PBoC euphoria before diving just seconds later, stabilizing, and then proceeding to crash anew, erasing most of the opening gains in a matter of minutes.

One might have expected this. After all, the fact that the central bank was effectively forced to intervene over the weekend is precisely the opposite of something that would inspires confidence: a simple fact that not one central bank has grasped in the past 7 years.

After all, the more backstops and interventions are required, the more fragile and less "fundamental" any given market is.

Of course, the fact that throwing the kitchen sink at the problem has so far resulted in only a feeble rebound, one which most are taking as an opportunity to sell into, will hardly help. And keep in mind, even if stocks closed green today, there is a long way to go to recover the recent bubble highs, highs which everyone now knows are well, bubbly.

With millions of shell-shocked, over-leveraged retail investors looking to cut their losses just as the PBoC funnels money to brokers to ramp up margin trading, expect the wild swings investors have seen over the course of the last two months to continue and indeed to become even more exaggerated as the battle between Politburo plunge protection and frantic farmer selling heats up.