China Stock Market Crisis: Quasi Nationalization Sputters, Shanghai Index Plummets 8.5%!

Last night I showed this…

And asked…

the Chinese government has been fighting domestic financial-economic battles on multiple fronts: the stock market, the property market, capital flight and the yuan.

Up to what extent can the Chinese government maintain the façade of normality? Up to what extent before the unravelling?

Today’s incredible 8.5% stock market rout may have provided part of the answer.

From Bloomberg

China’s stocks tumbled, with the benchmark index falling the most since February 2007, amid concern a three-week rally sparked by unprecedented government intervention is unsustainable.

The Shanghai Composite Index plunged 8.5 percent to 3,725.56 at the close, with 75 stocks dropping for each one that rose. PetroChina Co., long considered a target of state-linked market support funds, tumbled by a record 9.6 percent. The rout dented investor confidence from Hong Kong to Taiwan and Indonesia, helping send the MSCI Emerging Markets Index to a two-year low.

Monday’s retreat shattered the sense of calm that had fallen over mainland markets last week and raised questions over the viability of government efforts to prop up share prices as the economy slows. China’s industrial profits fell 0.3 percent in June from a year earlier, the statistics bureau reported on Monday. The International Monetary Fund has urged China to eventually unwind its support measures, according to a person familiar with the matter…

The Shanghai gauge had rebounded 16 percent from its July 8 low through Friday as officials went to extreme lengths to halt a rout that erased $4 trillion from the nation’s equities. Officials allowed more than 1,400 companies to halt trading, banned major shareholders from selling stakes and armed a state-run financing vehicle with more than $480 billion to support the market.

The above exhibits today’s broad based meltdown on Chinese stocks based on sectoral indices.

SCMP’s George Chen tweeted earlier that over 1,600 issues were down 10%  led by listed brokerages.

Today’s crash essentially wipes out a little over half the 16% recovery engineered by the Chinese government through the quasi nationalization that has been backed by an estimated $800 billion pump. This is aside from the implementation of draconian capital controls and the intimidation of 'malicious' (short) sellers.

So what will the Chinese government do next? Double down on the $800 billion support? Or will they implement Deng Xiaoping’s advice…(bold mine)

… some people insist stock is the product of capitalism. We conducted some experiments on stocks in Shanghai and Shenzhen, and the result has proven a success. Therefore, certain aspects of capitalism can be adopted by socialism. We should not be worried about making mistakes. We can close it [the stock exchange] and re-open it later. Nothing is 100% perfect

…which means a stock market holiday next?

Yet more signs why crashing stocks will impact the real economy, from the same Bloomberg article… (bold mine)

A gauge of industrial companies plunged by a record 9 percent, the most among the 10 groups on China’s large-cap CSI 300 Index, which sank 8.6 percent. The slump in industrial profits last month compared with a 0.6 percent gain in May, according to data from the statistics bureau. For the first six months, earnings slid 0.7 percent.

June’s equity market slump was very likely a contributor to the fall in industrial profits, according to Bloomberg Intelligence economists Tom Orlik and Fielding Chen. Chinese firms are major investors in the stock market. Back in May, when the National Bureau of Statistics was reporting rebounding profits, they acknowledged that investment gains were a big contributor.

Instead of investing in the real economy, many companies funneled their cash into the race to bid up stocks. So a sustained stock market crash will likely eviscerate liquid assets of balance sheets of many companies that will further expose on the fragility of excessive leverage of the Chinese political economy.

Will crashing Chinese stock markets compound on the silent run on the Indonesian rupiah- Malaysian ringgit to trigger the Asian Crisis 2.0, the 2015 edition?

Very interesting developments.