What Happened to the Xi Jinping Put? Chinese Stocks Fall into Second Bear Market as Offshore Yuan Declines!

Chinese stocks have hardly recovered from a bear market, yet today’s losses have brought the key benchmark to a secondary bear market from the December 2015 peak.

Yes, a bear market within a bear market.

The decline in the Shanghai index today, aggregated with all the losses from the December 22 high (green rectangle), has totalled 20.56%. Again this represents the second bear market. 

The major bear market trend (blue trend line) now tabulates to a hemorrhagic loss of 43.85% from the June 12, 2015 apogee. (images from Bloomberg and stockcharts.com)

Yet 20% down in three weeks represents a stunning collapse!

From Bloomberg,

Chinese stocks fell into a bear market for the second time in seven months, wiping out gains from an unprecedented state rescue campaign as investors lose confidence in government efforts to manage the country’s markets and economy

The Shanghai Composite Index sank 3.5 percent to 2,900.97 at the close, falling 21 percent from its December high and sinking below its nadir during a $5 trillion rout in August. Friday’s decline was attributed to persistent investor concerns over volatility in the yuan and a report that some banks in Shanghai have halted accepting shares of smaller listed companies as collateral for loans.

“The market entered a disaster mode at the start of the year and it’s still in that pattern now,” said Wu Kan, a fund manager at JK Life Insurance Co. in Shanghai. “The market has completely no confidence and the basic reason is that stocks are expensive, particularly those small caps,” he said, adding that he plans to swap large-cap shares for small caps.

The selloff is a setback for Chinese authorities, who have been intervening to support both stocks and the yuan after the worst start to a year for mainland markets in at least two decades. As policy makers in Beijing fight to prevent a vicious cycle of capital outflows and a weakening currency, the resulting financial-market volatility has undermined confidence in their ability to manage the deepest economic slowdown since 1990.

While China’s high concentration of individual investors makes the nation’s stock market notoriously volatile, losses in the Shanghai Composite have become one of the most visible symbols of waning investor confidence in the world’s second-largest economy.

After cheerleading by state media helped fuel an unprecedented boom in mainland shares last summer, the market crashed as regulators failed to manage a surge in leveraged bets by individual investors. A state-sponsored market rescue campaign sparked a 25 percent rally in the Shanghai Composite through December, but those gains were wiped out on Friday as the index closed at its lowest level since late 2014. Losses this year were fueled by the controversial circuit-breaker system, which authorities scrapped in the first week of January after finding that it spurred investors to rush for the exits on big down days.

So where the heck has the massive Xi Jinping Put been?

What happened to all the collective repression—the ban on short selling, the intimidation and the arrests of ‘malicious’ short sellers, the disappearance of top industry officials, the censorship of media, postponement of IPOs, the prohibition of sales by majority holders—the subsidies, the mandate by state enterprises to bolster the stocks—and the coaxing of the public to mortgage their houses or any assets just to buy stocks?

And speaking of mandates on state enterprises by the government, Goldman Sachs estimated that the government bought stocks worth 1.8 trillion yuan (USD 273 billion) between June and November last year. This should be a lot larger considering government buying from December through yesterday. Original estimates of government support were at $483 billion when the Xi Jinping Put was put into motion. Some put it somewhere near a trillion.

Think of all the losses now state owned companies now suffer from. If they have insufficient working capital or cash reserves, then they would have to be funded by the central government.

And considering that tax revenues should be down given the rapidly slowing economy, then just where will government be getting these funds to support the companies that have been supporting stocks?

And part of that answer could be seen in the widening of the gap between the government controlled onshore yuan (USD CNY right) and the offshore yuan (USD CNH left).

It’s not that the Chinese government has been purposely devaluing, rather, previous actions to contain the internal bubbles has only found an exit or outlet via the currency. And compounded by the deflating property and industrial bubble, the backlash from recent interventions has only accelerated the unraveling of the Chinese soft peg. 

It's simply market forces prevailing over the government. Or bluntly said, the Chinese government has been losing control!

And the attempt this week to fight currency “speculators” by the draining of liquidity as manifested in the skyrocketing of the HIBOR only had a very short term or one day effect.

The moral is: There is no free lunch forever.  The cost of political actions will surface.

As I previously wrote

The point is that the Chinese government may have spread their resources thin, or has started run out of resources to mount further rescues, or simply that, all attempts by the Chinese version of King Canute has failed to stop the tsunami of selling.

The more the government intervenes, the nastier the side effects or the unintended consequences.

Now that with BOTH Chinese currency and stocks under pressure, what’s next? The spread and escalation of strains on the property sector, the banks and the bond markets? Will there be cascading defaults?

Perhaps kick the can down the road policies by the Chinese government has met a dead end?

Or how about a China triggered Asian crisis circa 2016 (as predicted in 2014)???!!!

Yet more confirmatory signs that 2016 will be the year of the Grizzly bears.

Charts: Bloody First Week of 2016 for Global Stocks!

For the global stock market, it was a bloody start for the year 2016 

The following graphics exhibit on the returns of major equity benchmarks for the 1st week of 2016.

Americas

Asia

Europe

Middle East and Africa (tables above mine, data from Bloomberg)

This week's stock market bloodletting produced several milestones as shown by charts below from Zero Hedge

1st week losses by the Dow Jones Industrials and S&P 500 had been as big or bigger than 2008.

Germany's DAX was a record...

...and so was China's Shanghai index (in spite of the government's intervention particularly last Friday).

And bear markets appear to be spreading.

Decoupling anyone?

Wow! As the Yuan Dives, Chinese Stocks Crash 7+% Prompts Second Trading Halt for 2016!

Following Monday’s trading halt due to  the 7% stock market crash, the Chinese government spent the next two days managing or propping up the stock market. Yesterday, the Shanghai index even surged 2.25%

The Chinese government have been desperately attempting to cosmetically embellish its economy from its imploding bubble by price fixing market signals: interest rates (SHIBOR), the stock market and the currency.

Apparently, the market has been complexly porous and more powerful than the authorities wished them to be. [As side comment: The Chinese government increasingly looks like the supercilious version of King Canute.]  

So as they bolstered stocks, the selling pressures manifested elsewhere, this time on the currency markets or the yuan...

Most of the currency losses can be seen via the offshore yuan or the surging USD CNH

The USD CNH quote as of this writing...

The downside revaluing offshore yuan has likewise been reflected on the onshore yuan (USD CNY)... 

but the rise of the USD CNY has been at a lesser scale relative to the USD-CNH

So the gap between the freer offshore yuan (CNH) has been widening relative to the tightly government controlled onshore yuan (CNY). This implies that the Chinese government appears to be losing control! 

Yesterday's pressure on the yuan has has prompted US and European stocks to close significantly down.

The spillover effects from the battered yuan eventually boomeranged back to the source!

Barely 30 minutes from the opening bell, Chinese stocks cratered to over 7%!

And this automatically triggered the circuit breakers…which suspended trading anew for the second this first week of 2016!

The Bloomberg reported (this time attributing today's action to the yuan which they omitted last Monday)

Chinese stock exchanges closed early for the second time this week after the CSI 300 Index plunged more than 7 percent.

Trading of shares and index futures was halted by automatic circuit breakers from about 9:59 a.m. local time. Stocks fell after China’s central bank weakened the currency’s daily reference rate by the most since August.

“The yuan’s depreciation has exceeded investors’ expectations,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co. “Investors are getting spooked by the declines, which will spur capital outflows.”

Under the mechanism which became effective Monday, a move of 5 percent in the CSI 300 triggers a 15-minute halt for stocks, options and index futures, while a move of 7 percent close the market for the rest of the day. The CSI 300 of companies listed in Shanghai and Shenzhen fell as much as 7.2 percent before trading was suspended.

Chinese stocks in Hong Kong, which doesn’t have circuit breakers, slumped 4.4 percent. The offshore yuan fell to a five-year low before erasing losses

As I warned during my closing year outlook

Defending the US dollar soft peg required access to US dollars. Unfortunately, such window has been closing for the Chinese economy. Moreover, outflows and or capital flight have been compounding on the supply conditions of an already scarce US dollar. Finally, domestic credit expansion to save the stock markets translates to relatively more money supply vis-a- vis the US dollar (whether the Fed tightens or keeps policies at current levels). This implies supply side influences on the yuan’s weakness.

Hence, inflationism PLUS the scarcity of US dollar supply reveals why the US CNY soft peg cannot be sustained. Acting like a relief valve, China’s central bank, the PBOC, simply relented on the building pressures on the peg. The PBoC responded by allowing the markets to partially revalue the yuan. Hence the devaluation! ...

And it may not just be about capital flight but likewise, imploding bubbles should translate to money supply destruction. And this can be seen through the slack in money supply (M2) growth, slumping growth of CPI and deepening deflation in manufacturing input prices or the PPI

Importantly, considering China’s immense US dollar debt exposure, borrowing to pay back debt will only reduce US dollar supply. How much more when highly leverage companies default?

And this compounds on the US dollar dilemma which has now become a global phenomenon.

So while the USD CNY’s advance may not have been as steep as last August, the USD-CNY broke out from its allotted bandwidth.

The last time the USD-CNY materially advanced (again last August), the USD Php spiked, and global financial markets tremored.

Déjà vu August 2015? Or was August an appetizer or the blueprint of the things to come (for 2016)?

Headline of the Day: Death of the World’s Biggest Stock Market Index Futures Market By Capital Controls

My previous admonition on the likely repercussions of the Chinese government’s massive intrusion on her stock market:

Since markets are about exchanges or buying and selling, if one of the main function is banned, or severely regulated or impaired through the arbitrary interferences by politicians, who determine and impose on the price levels, then markets do not exist at all. Liquidity will practically shrink, if not evaporate. People’s resources will get stuck into assets that have no exit mechanism. So Xi Jinping Put will mutate into a Frankenstein market.

Capital controls not only inhibits movements or confiscates people’s properties, they reduce the economy’s access to capital.

Yet if the ‘war against sellers’ fails, which will be manifested through sustained downfall of Chinese stocks, then the Chinese government may likely declare a stock market holiday.

Well the segment of evaporating liquidity has now hugged the headlines.

From Bloomberg: (bold mine)

Add the world’s biggest stock-index futures market to the list of casualties from China’s interventionist campaign to stop a $5 trillion equity rout.

Volumes in the country’s CSI 300 Index and CSI 500 Index futures sank to record lows on Tuesday after falling 99 percent from their June highs. Ranked by the World Federation of Exchanges as the most active market for index futures as recently as July, liquidity in China has dried up as authorities raised margin requirements, tightened position limits and started a police probe into bearish wagers.

While trading in Chinese equities has also slumped amid curbs on short sales and an investigation into computer-driven orders, the tumble in futures volumes may cause even greater damage because of their central role in the investment strategies of domestic hedge funds and other institutional money managers. A failure to revive the market would undercut the government’s own efforts to attract professional investors to local stock exchanges, where individuals still account for more than 80 percent of trades.

“It is further evidence that the Chinese authorities are not yet ready to commit to freely trading markets,” said Tony Hann, a London-based money manager at Blackfriars Asset Management, which oversees about $350 million. “Fully functioning developed financial markets in China will take many years.”

Popular Tool

Chinese policy makers, intent on ending a selloff that has eroded confidence in their management of the economy, are targeting the futures market because selling the contracts is one of the easiest ways for investors to make large wagers against stocks. It’s also a favored product for short-term speculators because the exchange allows participants to buy and sell the same contract in a single day. In the cash equities market, there’s a ban on same-day trading.

Yet futures are also a popular tool among sophisticated investors with longer-term horizons. For hedge funds, they provide an easy way to adjust exposure to market swings. And large institutions use them to make cost-effective asset-allocation changes. As an example, selling index futures might be cheaper than unloading a large block of shares -- an order that could put downward pressure on prices.

A sustained slump in liquidity may spur some institutional investors to “give up hedging in futures, unwind futures positions and reduce their stock positions,” said Dai Shenshen, a trader at SWS Futures Co. in Shanghai.

China, which has been investigating evidence of “malicious” short selling since July, stepped up curbs on the futures markets on Monday. The China Financial Futures Exchange now labels a position of more than 10 contracts on a single index future as “abnormal trading.” While the bourse said the restriction won’t apply to futures used for hedging purposes, it didn’t detail how it will identify such trades. Before last month, investors could have as many as 600 contracts.

The bourse also raised fees for settling positions opened on the same day to 0.23 percent from 0.0115 percent. Margin requirements on stock-index futures contracts were lifted to 40 percent from 30 percent. For those with hedging demand, the levels climbed to 20 percent from 10 percent. Exchange officials didn’t respond to e-mailed questions from Bloomberg News on Tuesday.

Futures trading on the CSI 300 Index, a gauge of the nation’s biggest companies, shrank to just 34,085 contracts on Tuesday. That’s down from 3.2 million at the end of June and compares with the 30-day average of 1.7 million. For the CSI 500 Index of small-cap shares, futures volumes have dropped to 13,167 from about 144,000 a month ago.

A slomo death of the stock market it has been for China!

So the way for the Chinese government to the “stabilize” the market has been to disable sellers. 

Sellers have been castrated to the extent that people can only sell based on the prices that is considered politically allowable.

Yet all these massive interventions, i.e. capital controls, restrictions, intimidation, harassment, which includes the arrests of politically incorrect media personalities and industry participants, humongous credit financed mandated frantic bidding up by state owned enterprises haven’t been as smooth sailing as desired for by the authorities. 

China’s major equity bellwether the Shanghai Composite remains under severe pressure in spite of the raft of financial repression measures imposed. The SCOMP trades at the December 2014 to February 2015 levels as shown by the stockcharts.com

So throw “everything but the Kitchen sink” to manage the headlines!

Like the Philippine counterparts, the Chinese government has been obsessed with showbiz everything—economy, domestic politics, international relations or geopolitics, financial markets and more…

Touted reforms? Well the only reform that has become so evident has been of the deepening centralization or the reversal of market liberalizations to an anachronistic command and control economy instituted through political, economic, and financial market repression.

Yet while the Chinese government may succeed in pushing the stock markets up, the impairment of the foundations of stock markets, as already envisaged by liquidity drought, ensures that this would not be lasting. 

Moreover, such would have grave adverse repercussions down the road. 

Since everything is connected, ramifications will not be straightforward but will likely be manifested through various economic-financial pores: debt levels, interest rates, CPI, capital flows, currency or the property markets among many other possible rivulets.

The Chinese version of the tainted King Canute has yet to learn humility from their ‘fatal conceit’. 

They have yet to understand that as the great Ludwig Mises warned (Human Action,  p 552)…

The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.

So if all fails what’s next? The closure or a public holiday of the stock market?

Shocking Headline of the Day: At the G-20, China's Central Bank Governor Zhou Kept Repeating the 'Bubble Burst'!

Perhaps the Chinese central bank governor was talking in his sleep at the G-20 meeting to keep repeating that the "bubble burst"

From the Bloomberg:

Zhou Xiaochuan, governor of China’s central bank, couldn’t stop repeating to a G-20 gathering that a bubble in his country had “burst.”

It came up about three times in his explanation Friday of what is going on with China’s stock market, according to a Japanese finance ministry official. When asked by a reporter if Zhou was talking about a bubble, Japanese Finance Minister Taro Aso was unequivocal: “What else bursts?”

A dissection of the slowdown of the world’s second-largest economy and talk about the equity rout which erased $5 trillion of value was a focal point at the meeting of global policy makers in Ankara. That wasn’t enough for Aso, who said that the discussions hadn’t been constructive.

Bursting bubbles have become too obvious to deny? Well, China's deflating bubble could be seen as the appetizer.  The main course is coming.

China’s Stock Market Crisis and the Modern Day Sisyphus

Fund manager Tim Price sees the Chinese government’s approach to resolve her stock market crisis as a modern day Sisyphean act.

From the Cobden Center:(bold and italics original)

As symbols of futility go, that of Sisyphus takes some beating. In Greek mythology, Sisyphus was captured by the gods after having freed humanity from Death. They punished him, of course: he would spend the rest of his days pushing a boulder up to the top of a mountain. Just when he reached the summit, as perpetual torment for his efforts, the boulder would inexorably roll back down again. Sisyphus was condemned to push the boulder uphill for all eternity. His was the original rolling stone.

The American author Henry David Thoreau would go on to echo the essential pointlessness of Sisyphus’ struggle. In his own memorable phrase,

“Most men lead lives of quiet desperation and go to the grave with the song still in them.”

Today’s Sisyphus is China. More particularly, the Chinese authorities. They are determined to roll that boulder uphill.

The path of least resistance for the boulder, however, is downward. Gravity, after all, is a bitch. The Chinese stock market is still comparatively young, and as stable as any toddler overwhelmed by parental expectations.

With their boulder beset by the giant suck of gravity, China’s Sisyphus first cut rates, and trimmed banks’ reserve ratios.

The boulder continued to roll downhill.

So Sisyphus announced plans to slash brokerage costs. But the boulder was not in a mood to listen.

Sisyphus is nothing if not persistent. Next up: a relaxation of rules on margin trading. But the boulder remained impassive, and continued to roll downhill. Sisyphus threatened to look into illegal market manipulation, and to round up the usual suspects. Bothered, replied the boulder as it kept on rolling.

Sisyphus tried to repeal gravitational laws. He banned numerous accounts from selling the market short. But the boulder rolled on down.

So Sisyphus knocked heads together on the exchange, and rustled up a package of 120 billion yuan to help support the boulder. The boulder still fell.

Sisyphus tried to tackle supply. Over two dozen Chinese companies suspended their IPOs. But the boulder remained deaf to these efforts.

Sisyphus strong-armed his friends to put money into the market. The boulder was impassive.

Sisyphus warned of “panic” and “irrational selling”. The irony: Sisyphus warning of irrationality. Still, down she came.

Sisyphus began looking for a new market regulator. Good luck with that, replied the boulder as it resumed its imperious decline.

Sisyphus started moving pension fund money into the market. But the boulder kept falling.

Sisyphus tried to persuade anyone who would still listen that the real problem was not his own currency devaluation but fears over a looming interest rate rise by the US Federal Reserve. The boulder allowed itself a quiet giggle, and resumed its fall.

But Sisyphus will be back tomorrow, with new plans.

Global investors are right to be spooked by the example of Sisyphus. But they are learning the wrong lessons. Sisyphus is alive and well and active in western markets, too. He has been busily trimming interest rates across the developed world. He has been bidding up the price of bonds, with some kind of ‘cargo cult’ belief in a magical, trickle-down economic paradise. He has been distorting, warping, manipulating and destroying all he touches, in a fond belief that the State knows best.

Read the rest here

Central banks of today have all signified as the modern day version of Sisyphus.

Macau’s Casino Dependent Economy Crashes by 26.4% in 2Q, Kidnappings Surge!

When I wrote about the Philippine casino bubble in April 2013, I noted of the potential impact from the deterioration of the Chinese economy to Philippine and regional casino industry: “And the loses suffered by Singapore casino operators from unscrupulous bettors are just signs from the periphery, particularly the vulnerable Chinese economy, of the possible things to come.” 

Add the current economic stagnation to the political persecution of the opposition by the incumbent administration (operating under the slogan of “anti-corruption”), and to the financial repression in the context of the ongoing interdiction of capital flight,  (Yesterday the Chinese government reportedly imposed reserve requirement on financial institutions trading in foreign-exchange forwards), the outcome has been a perfect trifecta (economic, financial and political) storm: Macau’s casino dependent industry tailspinned in the 2Q!

From Bloomberg:

Macau’s economy dipped to its lowest since 2011 as high-end gamblers avoided the world’s largest casino market amid a widening crackdown on graft in China.

The city where gambling accounts for four-fifths of economic output saw GDP tumble 26.4 percent in the last quarter, according to government data released Monday. The drop worsened from 24.5 percent in the first quarter.

That’s the statistical economy on a freefall to its “weakest since early 2011”!

And Macau’s predicament has hardly abated. Casino revenues this August remains mired in deep losses.

The above signifies a wonderful depiction of the boom-bust cycle in motion as exhibited by casino earnings

Moreover, Macau’s junctures have begun to spillover to the political economy, as Macau’s government surpluses shrinks

While its economy fared worse than crisis and debt-laden Greece in recent months, Macau’s unemployment rate has held steady below 2 percent and its government maintained a surplus.

Still, the fiscal surplus of 8.63 billion patacas ($1.1 billion) in the second quarter has almost halved from a quarter earlier amid falling gaming taxes. Beijing-backed Chief Executive Fernando Chui had said he would cut some government spending if the casino downturn worsens.

Cut government spending? If this happened in the West, Macau’s administrator would be pilloried for mouthing a politically incorrect stance—austerity!

This also means that a prolonged economic rut will lead to deficits that would increase Macau's debt and magnify risks to its vulnerable economy and to financial instability.

Yet how has the industry been coping with the slump?

Macau’s casino operators have been trying to spark a revival with a series of new resorts aimed at drawing mainland Chinese tourists, heeding Beijing’s call for the city to reduce its dependence on gambling. Those numbers haven’t yet been forthcoming.

Package group tours from mainland China fell 19 percent in July from a year ago, even as the number of hotel rooms in the former Portuguese enclave increased 7.2 percent to 30,000, according to official data Monday.

Such slowdown hasn't been limited tot Macau, Hong Kong’s retail sales, according to Nasdaq, fell by a faster-than-expected 2.8% in July from a year earlier, dragged by a further slow down in inbound tourism and partly by the impact of the stock market's correction on consumer sentiment, the Census and Statistics Department said Monday. 

The above are manifestations of the deepening stagnation of mainland China’s economy.

Macau’s woes have predominantly been framed as an outcome of political actions. Instead of hunkering down, Macau’s operators will shift its business model paradigm by ADDING to current supply of hotels, shopping malls and other leisure based investments. 

As noted above, Macau’s dilemma have emanated from a combination of the growing slack in demand AND excess capacity.

And if expansion plans by the operators will be fulfilled, then this will only compound on the region’s excess capacity in the hotel-shopping mall-resort industry. And the bad news is that this implies of the spreading of financial losses, not limited to Macau, but to the region.

And China’s yuan depreciation will only exacerbate the region’s current conditions.

Meanwhile, there exists a feedback mechanism between economic downturn and debt. In Macau, this has hardly been apparent yet in her financial system. However, its social costs have emerged—a surge in kidnapping!

From Time.com:

Macau’s glitzy hotels and casinos are taking out insurance policies to protect themselves against a new threat to the house — the abduction of wealthy guests over unpaid gambling debts.

The risk of kidnapping has increased significantly in recent months as fewer numbers flock to the Chinese Special Administrative Region that also serves as the world’s largest gambling hub, reports the South China Morning Post.

This partly due to China’s slowing economy, meaning falling revenues for moneylenders that rely heavily on tourists from the mainland. As Beijing limits the amount of cash visitors can legally take to Macau, many high-stakes gamblers use local loan sharks for ready cash, which can be perilous if the cards and dice prove unfriendly.

As most kidnappings occur in guests’ rooms, hotels could face lawsuits from victims and their families. The insurance policies mitigate this risk with coverage for legal liability and crisis responders.

The Macau government reports that as many as 170 people were held against their will during the first six months of this year — more than double the figure for the same period of 2014. However, these are only the cases the authorities know about, with experts saying the true total is likely much higher.

Increase in the incidences of crimes and even possibly heightened risks on social instability will likely characterize an environment plagued by a deepening economic slump and or a financial crisis. 

Macau represents just one of the many proverbial canary in the coal mine.

Finally, here are updated stock market price charts from Macau’s casino majors.

MGM China Holdings (HK:2282)

Galaxy Entertainment Group (HK:27)

Sands China Ltd. (HK: 1928)

Wynn Macau Ltd. (HK: 1128)

SJM Holdings Ltd. (HK:880) owner of Grand Lisboa

Early August, much of these stocks mounted had ferocious 10-20% rallies. Some mistakenly thought that it was the beginning of a turnaround.

It turned out that such rally signified a “bull trap”.

The resumption of losses has virtually erased all short term gains. Or, presently, these stocks have been drifting lower than the level when the August rally commenced.

It’s a great example of bear markets “descending on a ladder of hope”.

By the way, Macau’s crashing stocks have also spread to affect its US based parent firms….

…thus contributing the swoon of the Dow Jones Gaming Index. That’s aside from US economy dynamics.

On a personal note: I am not an ivory tower expert who talks the world without  personally seeing them. So I went on the ground (one of Philippine casinos) last weekend to see for myself. And what I saw seems much aligned with what I have been writing about.

Chinese Government Spurs Last Hour Monster 5.34% Rally!

Following five straight days of hammering, the Chinese government posted another rare occasion where they succeeded to electrify their stock markets. 

Today’s 5.34% surge in the Shanghai index also comes after all the arrests associated with defying the governments interests and of yesterday’s “restrictions” of accounts which allegedly sold short the market.

Here is how the Bloomberg described of today’s action

The benchmark gauge jumped 5.3 percent to 3,083.59 at the close, with all of the gains coming in the last 45 minutes of trading. About 13 stocks rose for each that fell, with financial shares surging the most in a month. The Shanghai index tumbled 23 percent to an eight-month low in the past five days.

“Heavyweight stocks like banks and insurance companies helped pull up the index, and it’s possibly China Securities Finance entering the market again to shore up stocks,” said Zhang Gang, a strategist at Central China Securities Co. in Shanghai.

The Shanghai index fell into negative territory before that huge massive last hour push. This can be seen above.

And more…

A gauge of 50-day volatility on the Shanghai measure surged to its highest level since 1997 this week amid signs the government had pulled back from rescue measures to support the world’s second-largest stock market. The index tumbled 42 percent from its mid-June peak through Wednesday to erase more than $5 trillion of value as margin traders closed out bullish bets and concern deepened that valuations are unjustified by the weak economic outlook.

So the 1997 like volatility may have prompted today’s fierce pumping  by the government?

And possibly one of the institutions mandated to soak up on stocks may have been pensions, as tipped by SCMP’s George Chen.

And the injection of new funds into the banking system by the central bank, the PBoC, may have partly backed the financing of the stock market buying spree

Here is from another Bloomberg report:

China’s central bank brought out an array of tools to target stubbornly high financing costs this week, reducing interest rates, offering cheap loans and adding cash to the financial system through open-market operations. Money-market rates are finally buckling under the pressure, with the overnight rate breaking a record 39-day run of increases and interest-rate swaps slipping to the lowest since July. Supply of cash has lagged demand especially since a shock Aug. 11 yuan devaluation that saw the People’s Bank of China buying the currency on subsequent days to lend it stability. The monetary authority auctioned 150 billion yuan ($23.4 billion) of seven-day reverse-repurchase agreements Thursday, according to a statement on its website. It added the same amount on Tuesday, leaving a net addition of 210 billion yuan for the past two weeks, the most for open-market operations since February.

With the Chinese government practically lopping off or absorbing all the sellers, and with their declaration for keeping those shares for a long time, aside from all the other restrictions imposed on major shareholders, it’s really a wonder what would be the ramifications of the deformed or Frankenstein stock markets of China.

Anyway, in 2014 I predicted that part of the efforts to contain capital flows will be to sell China’s hoard of US treasuries.

I guess this thing is happening now. 

From Bloomberg: China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter. Channels for such transactions include China selling directly, as well as through agents in Belgium and Switzerland, said one of the people, who declined to be identified as the information isn’t public. China has communicated with U.S. authorities about the sales, said another person… The latest available Treasury data and estimates by strategists suggest that China controls $1.48 trillion of U.S. government debt, according to data compiled by Bloomberg. That includes about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts.

The effects of the government’s actions today will likely be short term. Yet all these interventions will have nasty consequences overtime. 

And present actions are signs of panic from an increasingly desperate government to stem the tide of rapidly deteriorating economic conditions in China.

Finally, has there been an unannounced collaboration with central banks/governments  of the West, the  particularly the US FED, with the goal to stabilize stock markets, as the reason for today’s big move by the Chinese government?