Via FTAlphaville comes Goldman on the Chinese stock implosion:
…the current annualized turnover velocity of 17.8x, which implies an average holding period of around 14 days, applies to ALL leveraged positions, we estimate that the current average cost basis of investors’ portfolio to be at around the 4855 level for SHCOMP and 5037 for CSI300 (i.e. average index level in the past 14 trading days). Using this approach and applying a 150% guarantee ratio as the trigger for margin calls, we believe the average margin financing position could be subject to margin calls if the market falls another 5% from current levels.
And from Bocom’s Hao Hong:
We estimate that the outstanding balance of margin trades through non-brokerage channels and umbrella trusts can be as high as two trillion yuan – almost double the official margin trading balance financed through brokers and regulated by the CSRC. These margin accounts have significantly higher leverage than those margin accounts with brokers – leverage ratio is anywhere from 1:3 to 1:5, with interest rate around 20% per annum. And they can buy into any stocks – not just the list of marginable stocks stipulated by the CSRC. As such, if the market plunges around 17%-25%, these accounts will be wiped out. Indeed, the market had plunged ~20% in the past two weeks, and thus should have triggered waves of margin calls. And the ferocity of the sell-off suggests that many of these calls had not been met.
Good luck controlling this. The bubble inflated in six months, surely the fastest in history, on pure margin leverage, now it’s going into reverse, probably more quickly.
This is it. The last major economy in the world has bet all its chips on the financial market. On Saturday, the PBOC slashed interest rates and the RRR. On Sunday, the national pension fund has been given permission to invest 2 trillion yuan in local government pensions.
China’s cabinet has approved plans for the manager of the country’s biggest pension fund to manage pension funds worth about 2 trillion yuan ($322 billion) for local authorities, two industry sources with direct knowledge of the matter said.
China is trying to strengthen its pension system to meet the huge demographic challenge of an already-shrinking working-age population as it looks to turn the economy into one driven by consumption and services rather than investment and exports.
The move for the National Social Security Fund (NSSF) to manage and invest more pension funds on behalf of provincial authorities could benefit the stock market, which has fallen 20 percent over the last two weeks.Chinese coverage dubs it a foregone conclusion, iFeng: 养老金投资股市或成定局 比例暂定不超3成:
Economic Observer newspaper explained obtained from a source close to the experts at the Department who, in one department, the Ministry of Finance and other relevant departments, to the social security fund to invest in stocks, there have been two distinct voices, but the current development pension to invest in stocks probably a foregone conclusion, and further information is displayed, limited to invest in stocks is the highest proportion of not more than 30%.
People close to the above Department expert said, adding that China’s pension including basic pension and supplementary pension, as of the end of 2014, China’s basic pension accumulated surplus of 3.5 trillion yuan, supplementary pension accumulation fund is more than 7600 billion yuan, according to 30 % share of investment in the stock market accounting, the stock market is expected to invest nearly 1.3 trillion yuan pension.On Sunday, it was also announced that internal audits at brokerages are complete. This isn’t a big change, but it lessens the regulatory scrutiny on Chinese brokers. The timing of the investigation may matter: it began in mid-June as the market peaked. Tightening of margin rules also emerged about the same time. Wallstreet.cn: 券商外接信息系统自查结束 暂停新增信托等交易功能
BTFD, but perhaps not until the explosion is over.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
