Karin Strohecker July 13, 2018
LONDON (Reuters) – Three years after a financial shock in China rocked world markets, a slower-motion 20 percent reversal of China’s main stock index and the yuan’s worst month on record have had much less of a viral effect around the globe.
Rather than the bolts from the blue investors endured over the past decade, Chinese market adjustments this year feel more transparent and akin to those in other developed markets.
That in part reflects a greater maturity of Chinese markets, defter control by Beijing authorities and the more resilient world economy.
A rapidly escalating trade dispute between Washington and Beijing that risks exaggerating the steady deceleration of China’s rapid national output growth has taken its toll on Chinese assets since the first quarter.
In June, some mainland indexes .CSI300 recorded their biggest fall since January 2016, when the bursting in June 2015 of China’s stock market bubble eventually spilled over into global markets.
“The bubble in 2015, that level was during a period of high euphoria, high speculation,” said Douglas Morton at Northern Trust Capital Markets.
At the time Chinese main indexes traded more in value than any other single index in the world, including the S&P 500 or Japan’s Topix, he added.
(Graphic: China Stocks Volumes – reut.rs/2NRhsoG)
“We are a long, long way off that at the moment, and the renminbi and the Chinese stock market has been relatively mature at this point,” he said, adding the lack of tampering by authorities in both currency and stock markets had also provided some reassurance.
In June and July 2015, China’s Shanghai stock index .SSEC lost more than a third of its value in just over two weeks. Both equity and debt markets suffered hefty outflows in the following months, according to data from the Institute of International Finance (IIF).
In recent months, China’s equity markets have seen steady inflows, underpinned by MSCI’s decision in June 2017 to include yuan-denominated Chinese stocks, known as “A-shares”, in its widely tracked emerging market index.
(Graphic: China fund flows – tmsnrt.rs/2KNxHRB)
With the trade spat between Washington and Beijing escalating in recent weeks, the IIF found non-resident portfolio equity flows had ground to a “sudden stop” in late June. But while overseas investment in Chinese shares has been on the rise, the share held by foreigners remains relatively small and high domestic retail participation in China’s local stock market provides some extra protection.
China Securities Index Co Ltd3493.2605
(Graphic: Daily non-resident portfolio equity flows – reut.rs/2NJhU8h)
The broad and deep economic recovery seen in the past few years has helped further diminish the prospect of sudden falls in China impacting other markets.
“Contagion happens not because of equity markets, contagion happens because of the real world,” said Paul Donovan, chief economist at UBS Global Wealth Management.
“The key thing about the last couple of years would be that European and U.S. domestic demand has really picked up, Asian domestic demand has started to pick up — and this is something that mitigates a lot.”
(Graphic: World Stocks and China Equity Indexes – reut.rs/2JiNlmr)
China’s currency has been another flashpoint in the puzzle that keeps investors preoccupied. In 2015, just two months after the stock market bubble burst, China’s central bank devalued the yuan by nearly 2 percent.
While the yuan has weakened in recent weeks both against the dollar and against a basket of currencies of its main trading partners, drawing a parallel with the sharp move three years ago does not take into account the prolonged emerging markets crisis of the time, said Zhou Hao at Commerzbank in Singapore.
Few fear China could see a “hard landing” — a specter that haunted markets in 2015. And yuan weakness is deemed to be a policy-loosening tool, alongside targeted reserve requirement cuts, while the increased access to onshore markets for foreign investors and a falling offshore yuan pool has made betting against the currency an expensive business.
But recent moves have sparked concern among some fund managers, said Benn Eifert, chief investment officer at QVR Advisors in San Francisco.
“There are investors who look back and see a lot of parallels to the third quarter of 2015, which started out this way, with kind of a long-trending decline in Chinese equity prices and then some rapid devaluation of the yuan. And that cascaded through global markets and led to a pretty big selloff,” said Eifert.
“You do see just general concern about what exactly is going on over there.”
Reporting by Karin Strohecker in London, additional reporting by Saqib Ahmed in New York and Andrew Galbraith in Shanghai, graphics by Karin Strohecker, Alasdair Pal and Tommy Wilkes in London; Editing by Catherine Evans
Source: Reuters “China market jolt far less contagious than 2015 shock”
Note: This is Reuters’ report I post here for readers’ information. It does not mean that I agree or disagree with the report’ views.
I pointed out the Chinese government’s ability to deal with stock market meltdown and gave the advice not to fight against a rich and powerful government in stock market in the following five posts:
Do Not Fight against Rich and Powerful Government in Stock Market dated July 29
China Punishes Short-sellers to Support Its Stock Market dated August 1
Stock Market Crash, a Golden Opportunity for CCP to Win Popularity dated August 6
Do Not Fight against Rich and Powerful Government in Stock Market 2 dated August 26
China Xi’s Iron Fist in Dealing Blows at Stock Market Irregularities dated August 27
True enough, according to Reuters’ report “Nerves on edge as Chinese authorities probe market mayhem” today, China has punished 197 people and will punish more through investigation for short selling and writing to push down the market in Chinese media. The following is the full text of Reuters’ report:
Nerves on edge as Chinese authorities probe market mayhem
BEIJING/LONDON By Paul Carsten and Nishant Kumar Mon Aug 31, 2015
The head of hedge fund manager Man Group Plc’s (EMG.L) China business has been taken into custody to help authorities in a probe into recent market volatility, Bloomberg reported on Monday, while separately a local financial reporter confessed on national TV to having spread false information that caused “panic and disorder”.
Both are likely to jangle nerves in the financial industry as regulators try to find out who they think was behind China’s wild stock market rollercoaster ride in the past three months.
Authorities have been investigating possible market manipulation following wild swings in the stock markets, .CSI300 .SSEC which have plunged around 40 percent since mid-June on concerns of a slowing economy and a surprise devaluation of the yuan currency CNY=CFXS earlier this month.
Officials are probing the financial industry amid allegations of malicious short-selling and other strategies seen as weakening confidence in the market.
Bloomberg, citing a person familiar with the matter, said Li Yifei, Man Group’s China chairwoman, was assisting with police inquiries, noting this doesn’t mean she faces charges or has done anything wrong. Reuters could not independently confirm the report.
Man Group spokeswoman Rosanna Konarzewski declined to comment on the matter, and China’s Ministry of Public Security could not immediately be reached for comment outside regular working hours.
Li’s husband, Wang Chaoyong, told Reuters he had spoken to his wife on Sunday and Monday, and she had told him she was in “highly confidential” meetings. “She said she was in meetings and it’s inconvenient for me to contact her,” he said by phone, adding he did not know where the meetings were taking place.
Separately, Chinese police are looking into the spreading of rumors about the stock market, as well as other issues such as the fatal explosions at a chemical storage facility in Tianjin.
On Monday, Wang Xiaolu, a reporter for the Caijing business magazine, read a confession on national state television, saying he spread false information in his reporting of the stock market that had caused “panic and disorder”.
“I shouldn’t have sought to make a big splash just for the sake of sensationalism,” he said.
It was not possible to verify whether Wang made his confession freely or under any coercion.
State news agency Xinhua said earlier that 197 people in total have been punished in the rumor campaign.
The investigations are likely to unsettle China’s investment community, and the report of Li’s involvement could leave foreign investors particularly on edge.
“Short run, any sane foreign businessman would have pause about doing business in China, given the environment,” said Bob Eisenbeis, vice chairman and chief monetary economist at Cumberland Advisors. “Long run, people will not overlook the size of the market and what that offers.”
Li, a former MTV Networks executive, was appointed Country Chair, China in 2011, according to a page on Man Group’s website archived by Google on Aug. 6. The page is not currently accessible.
Man Group says on its website it has $78.8 billion of assets under management.
(Reporting by Paul Carsten and Nishant Kumar, with additional reporting by Michelle Price, Shu Zhang, Richard Leong and Chris Kaufman; Writing by Rachel Armstrong; Editing by Mark Bendeich and Ian Geoghegan)
I said in my post “Do Not Fight against Rich and Powerful Government in Stock Market 2” yesterday that the Chinese government “can punish short sellers. Chinese law enables the government to imprison short selling speculators for the crime of disrupting the market. As for foreign investors, there are rules to restrict their sales of shares. China can tighten the rules while the speculators can do nothing but crying foul.
In addition, “(t)his is more a political than economic move aimed at winning popularity among the vast number of Chinese retail investors. It is what the Chinese government must do and must not fail!”
True enough Hong Kong’s SCMP describes the government’s moves in that respect in its report today.
Article by Chan Kai Yee as comments on SCMP’s report.
The following is the full text of the report:
Stealth mode: Chinese police spend weeks on trail in shock market probe
Investigators had been quietly building up to a surprise statement this week into alleged irregularities in China’s financial sector
PUBLISHED : Thursday, 27 August, 2015, 12:03am
UPDATED : Thursday, 27 August, 2015, 2:20am
The investigation “started quietly weeks ago” but its high-profile, late-night announcement took many by surprise, with some seeing it as a drastic response by Beijing to the “Black Monday” market rout that sent mainland shares to eight-month lows.
Xinhua announced on Tuesday night that eight people – including a top executive of a major mainland securities firm, an employee of a well-known media group as well as a serving and a former official of the national market regulator – had been taken away for questioning over alleged market malpractice.
Sources familiar with the case told the South China Morning Post on Wednesday that police had been making informal inquiries “for weeks” and the case was not directly linked to the market turbulence. But they said it did reflect the leadership’s determination to weed out rampant irregularities in the financial market.
“The investigation is not only about the current market correction. It was triggered by something bigger. It is more complicated than people think,” a former senior official with the China Securities Regulatory Commission (CSRC) told the Post.
The assessment came as Xinhua issued a commentary calling for greater efforts to “purify” the capital markets. It said more people would be implicated as the investigation went deeper.
The Xinhua commentary, posted on the central government’s website, vowed the police would “get to the bottom of things” and punish those caught in breach of market regulations.
Xinhua did not name the eight people but mainland media yesterday reported that Xu Gang, managing director of one of China’s biggest securities firms Citic Securities; Ouyang Jiansheng, a former CSRC department director in charge of market supervision; Liu Shufan, a CSRC division head; and Caijing magazine reporter Wang Xiaolu were among them.
Read more: Citic Securities among five of China’s top brokerages under probe amid stock market slump
Caijing issued a statement confirming that Wang Xiaolu was taken away by police on Tuesday for questioning, but said it had not been told of the reasons for the probe.
Citic Securities also said it had not been told about the nature of the investigation.
But a source at the magazine said it could be linked to an article by Wang published on July 20 – soon after the government unleashed hundreds of billions of yuan to bail out the beleaguered market. In that article, Wang claimed the CSRC – a key part of the massive bailout – was preparing an exit plan. The regulator immediately denied the story.
The source said the magazine was under huge pressure to rectify its reporting practices after it published the article.
Mainland markets have been on a roller-coaster ride since mid-June and government efforts to intervene have had little success. The A-share market has fallen more than 22 per cent in the past five days.
A team of investigators led by the Ministry of Public Security was sent to the CSRC’s office on July 9 to uncover “malicious short-selling” that the government blamed for the turmoil.
Separately, four other securities firms also announced on Tuesday night that they were being investigated by the regulator. Haitong Securities, GF Securities, Huatai Securities and Founder Securities all said they had been notified by the regulator about the probe.
On July 29, I had a post titled “Do Not Fight against Rich and Powerful Government in Stock Market”, giving the advice that selling short against rich and powerful Chinese government’s efforts to stabilize the Chinese stock market is doomed to failure.
I cited the incident of Hong Kong government defeating international speculators’ attack at Hong Kong stock market during the Asian financial crisis. Hong Kong government made huge profit from its intervention of the stock market.
Now, the history is repeating. Speculators are attacking Chinese stock market against Chinese government’s efforts to stabilize the market.
The problems for the speculators are:
First, the Chinese government has the best sources of information about the market so that it knows what level to buy with certain profits.
Second, it has much more the financial ammunition for the battle. Speculators have limited supply of shares for selling short as the number of shares in the market is limited. The government, however, has the power to forbid large shareholders’ sales of their shareholding; therefore, the speculators have limited ammunition.
The government, on the other hand, has unlimited ammunition. First, it can increase money supply to such an extent as to enable it to buy the entire market. As a result, there will be no supply of shares for speculators to sell!
Do not forget, Chinese currency is printed and issued by the Chinese government. Oversupply of Chinese currency will cause the exchange rate of the Chinese currency to fall, which is precisely what the Chinese government wants to support its economy and increase export. The Chinese government is killing two birds by one stone in doing so.
True enough, the Chinese government reduced interest rate and relaxed reserve requirements yesterday to increase money supply. There will be more money and less shares to buy!
Third, the government can change the rules while the speculators cannot. It can punish short sellers. Chinese law enables the government to imprison short selling speculators for the crime of disrupting the market. As for foreign investors, there are rules to restrict their sales of shares. China can tighten the rules while the speculators can do nothing but crying foul.
The last but the most important: This is more a political than economic move aimed at winning popularity among the vast number of Chinese retail investors. It is what the Chinese government must do and must not fail!
Article by Chan Kai Yee as comments on Reuters’ report “China cuts rates, relaxes RRR”
The following is the full text of Reuters’ report:
China cuts rates, relaxes RRR
Tue Aug 25, 2015 8:12am EDT
China’s central bank cut interest rates and relaxed reserve requirements for the second time in two months on Tuesday, cranking up support for a stuttering economy and a plunging stock market that has sent shockwaves around the globe.
ZHOU HAO, SENIOR ECONOMIST, COMMERZBANK, SINGAPORE:
“This move makes sense from economics point of view. The real interest rates have stayed above double-digit for a few quarters, suggesting that the policy rates should be lowered aggressively. The market liquidity conditions have tightened significantly since the “one-off devaluation”, as PBoC bought CNY against USD to stabilize the exchange rate. In fact, we have seen that the agent banks stepped into the offshore market this afternoon to offer liquidity.
“However, the side effect of monetary easing is the depreciation pressure on CNY and the potential capital outflows. In fact, the question remains whether China wants to see more currency depreciation.”
LIU LI-GANG, CHINA ECONOMIST, ANZ, HONG KONG:
“This is within our market expectations, the only small added is the interest rate cut, including the lower lending rate and deposit rate. The 50 basis point RRR cut is more important. This will inject 650 billion renminbi ($101.38 billion), a huge amount. This will ease hard landing concerns.
“We should see some rebound in September or October and growth should rebound in the fourth quarter … The Caixin PMI data was very weak and we expect the official PMI to also be quite weak. Although this has some elements of giving comfort to the market, this is more about giving a real boost to the real economy so the government can continue to have its 7 percent growth rate fulfilled – although I don’t think that’s possible. But in the second half of the year, if they don’t have very disappointing growth, they may get closer (to the target).”
PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:
“The measures will certainly stabilise sentiment in the short term. “(But in the longer term) it’s debatable whether the moves in monetary policy can stabilise equity markets. One hopes the easing in monetary policy would help the economy.”
ANALYSTS AT JPMORGAN
“China’s decision to cut reserve requirements by 50 bp will be regarded by many investors as overdue, but nevertheless reassuring. It was the failure of the authorities to act over the weekend that seemed to spook markets yesterday as it strengthened the impression that Chinese policymakers were starting to rely more heavily on the exchange rate as a way of stimulating demand as opposed to taking additional domestic policy measures.
“Today’s decision helps to correct this impression, and is naturally relieving some of the strain on highly stressed trade partners and commodity exporters. The litmus test will come overnight, however, and the efficacy of the RRR cut in boosting the domestic stock market. For now, though, expect to see a further, albeit by no means complete, reversal of yesterday’s moves (i.e. EUR and JPY lower, the dollar, commodity and EM FX higher).”
WEI YAO, CHINA ECONOMIST, SOCIETE GENERALE, PARIS:
“The PBOC is doing what it has to do, but it is very likely it is not enough so more will have to be done. The cut in the reserves rate (RRR), that was well expected, so no surprise at all and we have to remember that cutting RRR right now is not easing. It is just preventing a tightening.
“The interest rate cut is a bit of a surprise, but the signal of easing is offset a bit by the recent liberalisation of the deposit rate.”
KALLUM PICKERING, SENIOR ECONOMIST, BERENBERG
“Will it be enough? It’s difficult to say – it’s not a huge rate cut but it does show markets that they are willing to act in order to arrest any slowdowns. It has proved to markets that China is willing to act. Investors have been waiting for them to act and they have.
“Is this sufficient? It might not be, but it does set a precedent that they are engaged and looking to prevent any further declines. The key point to make with China is that it does have considerable policy levers if necessary – the interest rate is not low by global standards and they can always rely on their more traditional policy tools such as public investments if it’s a slowdown in the economy that is taking place.”
MARK WILLIAMS, ECONOMIST, CAPITAL ECONOMICS, LONDON:
“It might suggest there’s a change of tack now from directly trying to shore up the equity market to trying to limit downside risks facing the economy.
“We’ve seen over the past couple of days that the so-called ‘national team’ hasn’t stepped in to stop the equity market from falling, so perhaps they have realized the futility of trying to prop up prices through direct purchases and it makes sense to concentrate on the macro repercussions.
“It may help shore up equity prices but I don’t think we’re going to get a big rebound. I think that too many investors in China have been burned badly from what we’ve seen over the past few weeks and won’t be too eager to step back in.”
NIE WEN, ANALYST, HWABAO TRUST, SHANGHAI:
“I think the cut of RRR and interest rates is mainly aimed at supporting the stock market, as well as to ease capital outflows following yuan depreciation. It will offer a buffer to the tumbling stock market, but isn’t likely to have material support.
“The deposit rate cut is out of our expectation given CPI will soon exceed 2 percent, which will push the real interest rate into a negative territory. There’s little room to further cut benchmark rates in the coming few years as negative rates will hurt the economy and financial markets.”
ANDREW POLK, RESIDENT ECONOMIST, CONFERENCE BOARD, BEIJING:
“That’s quite a move. Seems like everything but the kitchen sink. Clearly the timing is all about the double-whammy of the stock market and downward pressure on the currency, both of which I’d argue they brought on themselves. They stood back and watched while the stock market ran up, then had a ham-fisted response when it fell, that created the need for a correction but made it more difficult to react … The RRR cut buys them some time as far as having to allow the currency to depreciate, because defending the exchange rate and providing liquidity are at odds with each other.”
(Reporting by Pete Sweeney, Marc Jones, John Geddie, Jake Spring, Marius Zaharia and Sudip Kar-Gupta Compiled by Ian Geoghegan)