But, while the Shanghai composite was up 5.8% and shares in Shenzen rose sharply as well, the storm is likely far from over. And, it is worth remembering the context in which this brief respite comes. And, importantly how much
As Bank of America Merrill Lynch pointed out in its Thundering Word note yesterday, the market cap of the Shanghai composite has fallen $1.96tn since 12 June. An amount, BoAML says is roughly the same as the GDP of India. And, it adds, there might still be more to come: “The duration & magnitude of the initial drop from the high in eight well-known bubbles has been on average 51% in 90 trading days. Thus far, Shanghai is down 32% in 17 trading days.”
And, while it looks as though the Chinese government’s intervention, which includes buying shares outright, and banning investors with holdings more than 5% from selling shares and, most recently, allowing lenders to ease margin requirements for some wealth management clients, these too will come with a cost.
As Mark Konyn, chief executive officer at Cathay Conning Asset Management Ltd in Hong Kong told Reuters, while the authorities are capable of slowing the selling and extending market support: “this high level of intervention comes at a significant cost. Such intervention locks up ownership of shares, reduces liquidity and creates an overhang that could plague the market for years.”
Indeed, with these interventions, some commentators have said, the authorities also run the risk of discouraging foreign investors and index providers from coming into the market.
Maarten-Jan Bakkum, senior emerging markets strategist, multi-asset team, NN Investment Partners is of the view that after doubling in only 12 months, which the Chinese equity market has done, a 30% correction in itself should not be a problem, especially because the rally was never led by fundamentals.
“The problem only is that the authorities have tried to stop it…The Chinese policy makers, who have managed the economic success of the last decades very well and who are seen, particularly in China and the rest of Asia, as infallible, when it comes to economic and financial management, are now losing their credibility rapidly,” he said.
Adding that the timing is particularly poor because of the government’s plans to swap debt for equity through numerous IPOs. This is now off the table, which could see indebtedness in China continue to grow, adding further pressure to the banks.
