State Signals

China’s benchmark stock index, the Shanghai Composite, slid by a further 5.9% today, bringing its fall of the past 16 trading days to an eye-watering 32%, a bit like 5000+ Dow points being wiped-out in less than three weeks. For added context, the late 1990’s tech-bubble-bust saw America’s Nasdaq Composite Index vaporise about $US5,000,000,000,000 of market “wealth,” over a two-year period, whereas China’s SH Comp has already seen a $US2 trillion wipe-out within a fortnight.

Just as the organs of state, including the financial regulatory bodies whose mandate should be to ensure financial stability, presided over a reckless expansion of credit via a now very difficult to control “shadow banking system,” they are intervening once again in a futile effort to stop the rout.

The state has cut interest rates, halted initial public offerings, forced institutions to buy shares and watched the suspension in trading of 1300 companies shares, representing $US2.6 Trillion and locking up about 40% of China’s market capitalisation.

Will it work?

Whilst the rate of decline of the index may slow shorter term, of even reverse for a few days bounce, it will not be down to state intervention, whose measures, both pre and post market bust, have guaranteed a sizable rout.

The index is now showing the classic bust following the one year boom, with it led by leverage, aka margin debt, growing five-fold, which has fuelled the surge, as can be seen below:

8 July 2015 Blog

The unwinding of margin calls are now fuelling the bust, compounded by the out-lawing of short selling by the major players, thus eliminating future buyers as and when they need to cover their shorts.

History is littered with examples of market damage due to state intervention and this one is unlikely to be any different.

Watching the what, where and when state intervenes, not just in China but all governments’ and their conduits, can offer great market signals, China is just the latest example, albeit that it is likely to have far wider ramifications than just in China.

 

 

 

 

 

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One response to this post.

  1. […] with examples of market damage due to state intervention, within the early July 2015 posting, “State Signals,” which related to the folly of the Chinese authoritie’s endeavours to reverse a […]

    Reply

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