In China, Hairdresser Bull Call Goes Horribly Wrong, Broker IPO Crashes 31%

Around two weeks ago, Wang Weidong, who WSJ describes as “one of China’s top fund managers,” drew a crowd so large at the Grand Hyatt in Lujiazui that the building’s air conditioning unit was, much like the SHCOMP’s volume tracking software in April, overwhelmed by the sheer number of aspiring Chinese day traders in attendance.

The message was clear: buy Chinese stocks.

“The 4000 level was only the beginning of the bull market,” Wang said, implicitly suggesting that the greater fool theory of investing is the way to go if you’re trading on the SHCOMP or the Shenzhen. Wang even went so far as to suggest that anyone who chose to take a vacation instead of spending their holidays day trading was making a big mistake. “They say the world is too big and I need to go and take a look. I would say, the stock market is hot, so how can I leave it behind?” he asked.

Anyone who took that advice — and you can bet quite a few of the 600 attendees did — was in for a rude awakening.

Chinese stocks have suffered a brutal sell-off over the past three weeks as a massive unwind in the shadowy world of backdoor margin lending has overwhelmed official efforts to stop the bleeding and indeed, even a weekend move by the PBoC to pledge central bank support for increased margin lending (and yes, that is as ludicrous as it sounds) wasn’t enough to stabilize the market as evidenced by the SHCOMP’s wild ride on Monday.

Here’s WSJ with more on why your hairdresser won’t always be right when it comes to identifying attractive entry points.

On a hot, humid Sunday afternoon in mid-June, around 600 eager stock investors packed the largest ballroom at the Grand Hyatt in Lujiazui, Shanghai’s equivalent of Wall Street.

 

With Chinese stocks at a seven-year high, the investors had gathered to listen to a talk by one of China’s top fund managers, Wang Weidong, of Adding Investment. The crowd was so large, the air conditioning couldn’t keep up and hotel staffers brought in chairs and bottled water for the sweaty participants.

 

Today the Shanghai index and smaller, more-volatile indexes in Shenzhen are off more than a quarter from highs reached in June.

 

Even after the peak, new investors opened millions of brokerage accounts so they could play the rally. Sophie Wang, a 32-year-old college art teacher in Nanjing, said in a recent interview that she opened her first stock trading account two weeks ago and bought some shares on “the advice of my hairdresser.”

 


 

Ms. Wang said her holdings are down 32%. “I don’t really follow news on stocks that closely. My hairdresser said it was still a bull market and I needed to get in,” she said. 

 

She said she didn’t know what to do when the market started falling and she is still holding her shares.

 

The government has shown increasing concern about the selloff, but its efforts, including an interest-rate cut, have failed to stem the slide. On Saturday, Beijing took its most-decisive action yet, suspending initial public offerings and establishing a market-stabilization fund to spur stock purchases. The Chinese central bank also pledged to provide funding to support brokerages’ margin finance operations that allow investors to borrow cash to buy stocks.

 

China has suspended IPOs before in hopes of boosting the market by way of cutting supply. This time, the stakes are higher because an estimated four trillion yuan ($645 billion) worth of IPOs was in the works, and Beijing had hoped to use a buoyant stock market to help heavily indebted companies raise cash.

Speaking of IPOs, it appears as though brokers are just as ineffective at propping up their own shares as they are at providing plunge protection for the broader market, because as the following from Bloomberg makes clear, Guolian Securities' debut did not go as planned

Chinese brokerage Guolian Securities Co.’s shares tumbled in the worst major Hong Kong trading debut since 2011, even after China rolled out emergency measures to stabilize the nation’s stock market.

 

Guolian closed 31 percent lower than its offer price at HK$5.51. 

 

Guolian’s debut was the worst since 2011 for any Hong Kong initial share sale of at least $100 million, Bloomberg-compiled data show. While the securities firm’s shares were in part catching up with market declines since the stock was priced on June 26, investors are concerned that the Chinese slump isn’t over, Castor Pang, head of research at Core Pacific Yamaichi in Hong Kong, said by phone.

Where we go from here is anyone's guess because as we noted on Sunday evening, retail investor psychology has now suffered irreparable damage, meaning panicked hairdressers and banana vendors looking to sell the rips will be battling the PBoC for control of an insanely volatile market.

In short, 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.