China’s Stock Market Vaudeville: Powerful Two Day Rally Almost Offsets One Day Crash

Over the past two days the China’s equity benchmark the Shanghai Composite mounted a powerful rally (6.56%) that has thus far erased about 85% of losses from Monday’s 7.7% crash.

First I noted of what looked like a conflict in policies between Chinese central bank, the PBOC and the Regulatory Commission

The Chinese central bank, the PBoC wants to more credit into the system--yet  part of these funds finds its way to the stock markets--while the Regulatory Commission desires to curtail speculative credit flows into the stock markets.

So which agency will prevail, the PBoC or the Regulatory Commission?

Here is how media sees yesterday’s 4.74% comeback. From Bloomberg: (bold mine)

Chinese stocks posted the biggest two-day rally since 2009, led by financial companies, as investors speculated Monday’s rout was overdone given prospects for further monetary stimulus…

Stocks rebounded after China’s securities regulator said it isn’t trying to curb equity trading.

Perhaps, the Regulatory Commission had been surprised by the market's intense reaction, and consequently, has eluded the burden of responsibility from the ramifications of their policies, so the regulatory commission folded.

The two day rally has apparently been indirectly supported by the PBoC.

Just a day back, the PBoC injected funds to troubled companies 

From Bloomberg:

The People’s Bank of China rolled over a medium-term lending facility to Shanghai Pudong Development Bank Co. today, and lent additional money to the bank, according to people familiar with the matter, who asked not to be identified because they aren’t authorized to speak publicly.

The central bank extended 20 billion yuan ($3.2 billion) of matured MLF to the Shanghai-based lender, and gave an additional 20 billion yuan via the same facility, Sina.com.cn reported today, citing unidentified people. Industrial Bank Co. was granted an additional 20 billion yuan, after the PBOC extended 30 billion yuan that matured.

So a stealth bailout by the PBoC.

As I noted during the one day crash

Given the huge growth of stock market credit or the record levels of margin debt, losses from today’s crash will likely lead to margin calls which may prompt for even more selling. And absent access to new credit many heavily levered firms will see their balance sheets impaired from sustained stock market losses.

But if regulators are here just to put a brake, or in effect, a façade at it, then today crash could just be part of the script to a manipulated boom.

And perhaps, the other way to look at it is that the seeming clash in policies has really been part of the theatrics to contain the stock market mania which apparently has failed.

Of course, Chinese stocks have dependent on PBOC’s policies where expansionary credit will find ways (like the Shadow Banking system) to chase yields. Again as I noted the other day:

For as long as the PBoC promotes financial repression (zero bound) policies via expansionary credit into the system, yield chasing via asset speculation will be funded via different channels whether it is the formal or the informal system. There will always be novel ways to go around the curbs.

What the current episode reveals has been the intense buildup of volatility which implies of very unstable markets or that stock markets that have morphed into grand casinos.