What goes up MUST come down: China’s Shanghai Index DIVE 5.43%!

What goes up must come down.

China’s streaking hot stock market which has seen a Viagra like vertical climb as noted last week seems to have hit its speed limits.

From Bloomberg:

Chinese stocks tumbled the most since 2009 amid volatile trading that spurred the benchmark index’s biggest swings in five years and sent turnover to a record.

The Shanghai Composite Index (SHCOMP) dropped 5.8 percent to 2,844.11 at 2:54 p.m. local time, heading for the steepest retreat since August 2009, after earlier gaining as much as 2.4 percent. Lower-rated bonds fell and the yuan weakened to a more than four-month low after policy makers said riskier bonds can no longer be used as collateral for some short-term loans.

Volatility in Chinese stocks is increasing, with the Shanghai index swinging by more than 250 points today, as investors assess the sustainability of a rally that has topped every other market worldwide during the past month and propelled share prices to the most expensive levels since 2011. The value of equities changing hands on exchanges in Shanghai and Shenzhen reached a combined 1.24 trillion yuan ($200 billion), almost five times the one-year average.

The incredible intraday volatility of the Shanghai composite can be seen in the above. The SSEC spiked by 2.3% by midday followed by a meltdown through the session's close.

But instead of 5.8% loss as indicated by the report, the SSEC closed down 5.43% after a minor rally near the session's end. So today's session had an astounding 7%+ swing!

Why the collapse? Because the Chinese central bank, the PBoC, has been reported to have applied "tightening" via a reduction of collateral availability used for margin. 

Writes the Zero Hedge (bold original)

the PBOC appears, by its actions tonight, to be concerned that things have got a little overheated in its corporate bond and stock markets as hot money ripped into the nation's capital markets on hints of further easing and QE-lite a few months ago. In a show of force, the PBOC simultaneously fixed CNY significantly stronger (implicit tightening) and enforced considerably stricter collateral rules on short-term loans/repos. With Chinese stocks concentrated is even fewer hands than in the US (and recently fearful of the surge in margin trading), it appears the PBOC is trying to stall the acceleration is as careful manner as possible. The result, as Bloomberg notes, is a major squeeze in CNY (biggest drop since Dec 2008), interest-rate swaps ripped higher along with corporate bond yields,  and most Chinese stocks sold off (with two down for every one up) though the latter is stabilizing now.

Perhaps in realization that soaring stock markets meant more destabilization than prosperity, the PBoC may have acted to spurn the spectacle of intensifying speculative orgies. The PBOC, in the words of former Fed governor William McChesney Martin, "has ordered the punch bowl removed just when the party was really warming up".

Again as I noted last weekend:

The bottom line: there is no free lunch for money printing. Natural barriers will emerge to eventually prevent debt overload or from a full-scale destruction of the monetary system.

We will see how effective the PBoC's "taking away of the punch bowl" will be over the coming days. 

Yet if losses will be sustained, then the critical question is how will these affect margin trades or trades funded by debt, which reportedly hit record levels?  

More interesting developments.