This Could Be Very Bad News Ahead Of China's Open Tonight

Earlier today we explained why far from supporting the stock market, all the Chinese RRR cut did was offset already used funds to support currency intervention following the August 11 devaluation: the one sentence from SocGen that put it in perspective was tthe following: "In perspective, the PBoC may have sold more official FX reserves than this amount since the currency regime change on 11 August."

Hence, the RRR cut was a retroactive move, not at all proactive as the market's initial euphoria indicated.

Which, ahead of China's close tonight, could be very bad news for those hoping for a rebound in China's Shanghai Composite which as a reminder closed below 3000 for the first time since its bubble runup which started last July.

Here, according to Bloomberg, is the reason why:

China halts intervention in stock market so far this week as policy makers debate merits of an unprecedented government campaign to prop up share prices and what to do next, according to people familiar with situation.


Some leaders support argument that stock market is too small relative to broader economy to cause crisis, says one of the people, who asked not to be identified as deliberations are private.


Leaders also believe intervention is too costly, person says.


Those who back intervention argue that market meltdown could pose danger because banks offer wealth-management products tied to market performance, people say.


Government’s current priority is success of military parade set for Sept. 3 in Beijing commemorating end of World War II, people say.


China Securities Regulatory Commission doesn’t immediately respond to faxed request for comment.

So if the liquidity from the RRR had been already used up, and if China will not step in to prop up stocks, what will?

And why is China doing this? The FT had an interesting theory earlier today:

The China-led turmoil that has rocked global markets in the past two weeks has also shaken the ruling Communist party and left Li Keqiang, the prime minister, fighting for his political future, according to analysts and people familiar with the internal workings of the party.


Among party officials and politically connected people in Beijing, the hottest topic of conversation is whether Mr Li will take the fall for Beijing’s perceived mismanagement of the stock market crash and the country’s broader economic slowdown.


“Premier Li’s position has certainly become more precarious as a result of the current crisis,” said Willy Lam, an expert on Chinese politics at the Chinese University of Hong Kong. “If the situation worsens and if there comes a point where [President Xi Jinping] really needs a scapegoat, then Li fits the bill.”


* * *  


Mr Li is already regarded by most analysts and political insiders as the country’s weakest premier in decades, thanks largely to Mr Xi’s aggressive concentration of power in his own hands.


Mr Li was once thought to be the most likely candidate to replace former President Hu Jintao, before he was instead anointed as Mr Xi’s number two in 2012.


The premier is regarded as a leading member of the faction centred on Mr Hu, known as the Communist Youth League group. But Ling Jihua, one of the most prominent members of that faction and Mr Hu’s former personal aide, was arrested earlier this year on Mr Xi’s orders on charges of corruption and abuse of power.


* * *


“In any other country facing such a big crisis you would see senior officials coming out to reassure the public, but since early July no Chinese political heavyweight has come out to say what’s going on or what the government plans to do about it,” said Mr Lam. “This has fuelled speculation that there are real divisions at the apex of the party.”

Maybe Li rubbed Xi the wrong way, maybe Xi just wants to put one of his own people in the premier's shoes, maybe the two just don't see eye to eye, whatever the reason, what matters is that Xi now has an "out" from the whole market mess: his prime minister, whom he can hand over to the furious masses to deal with as they see fit, thus washing his hands of the whole Chinese epic stock market bubble pop and moving to bigger and better bubbles.