Cross-posted from Investing in Chinese Stocks.
WSJ:
People’s Bank of China Cuts Interest Rates The PBOC cut its one-year benchmark lending rate by a quarter of a percentage point to 4.85% and its one-year deposit rate by the same scale to 2%.
At the same time, it also lowered the reserve requirement by half a percentage point for banks with sizable lending to farmers and small businesses.
The central bank has rarely cut both interest rates and the reserve-requirement ratio on the same day. The last time it did so was in October 2008, the height of the global financial crisis.
Yu Fenghui: Why did the central bank drop a nuke? 央行周末為何放出“核武器”
Yu says the dual cuts are designed to give the stock market a shot in the arm, but he wonders how much of an effect it can have. He wonders what happens if stocks open at a high on Monday and then trade lower on the day, it would show the PBOC’s rarely used weapon cannot save the market.
While the stock market may have influenced the decision, if the PBOC wanted to hike rates before Q3 starts, this was the last weekend to do it.
Meanwhile:
Lending outside of brokerages is the main driver of excessive leverage. Investors can only lever up 2:1 with their broker, but not a few investors in China are levered 5:1. They take out loans to reach the ￥500,000 in capital needed to qualify for broker margin, or layer outside margin on top of their main account.
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FT: Shadow lending crackdown looms over China’s stock market
A universe of so called “fund matching” companies, known in Chinese as peizi, has sprung up over the past year to provide margin funding to virtually anyone who asks. Officially registered as consulting companies, these groups also subscribe to the subordinate tranche of umbrella trusts.
After opening a securities account at a brokerage, fund-matching companies use a software program produced by Shanghai-listed Hundsun Technologies — controlled by Alibaba founder Jack Ma — to divide the account into multiple sub-accounts that enable peizi clients to trade independently. The peizi company, as the official account holder, maintains ultimate control and can liquidate any sub-account if the investor racks up heavy losses.
In mid-April China’s securities regulator told brokerages to stop working with umbrella trusts. On June 13, a Saturday, the agency followed up with rules explicitly forbidding them to co-operate with fund-matching companies by offering them direct access to their electronic trading systems. The country’s stock markets began their tumble the following Monday.
Market participants say peizi companies are continuing to operate, but that the scale of funds and degree of leverage is significantly reduced.
And down goes the stock market.
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Reuters: China stock regulator says market fall reversing excessive gains
China’s securities regulator said on Friday that recent falls in Chinese stock markets were just reversing unwarranted gains after a strong run-up and that the economy was showing clearer signs of stabilizing despite the fall.
“It’s a self-adjustment of the market after earlier excessive gains,” the China Securities Regulatory Commission’s spokesperson Zhang Xiaojun said at the regulator’s weekly news briefing.
“Recently, there has been more volatility in the stock market. That requires all sides to treat it rationally.”
iFeng: 证监会：市场下跌是自然调整 三因素有利于激发市场
Zhang Xiaojun also said that the Commission recently adopted a series of optimization margin activities in order to achieve a counter-cyclical regulation, will help to maintain long-term stable operation of the market, the Commission shall perform the regulatory functions will continue to crack down on insider trading, market manipulation rights violations against the investment, the reduction of provisions for breach of promise of major shareholders behavior against the law. Zhang Xiaojun also reminded investors to not be gullible, not follow blindly, to jointly promote the stable development of the stock market.
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Is this a sign the bottom is near? iFeng: 分析：周末若无重磅救市措施 下周直奔4000关口
Without major rescue measures this weeked, straight to 4000 points next week!
Yes, you’re a witness to history: This is the crash! This is the crash! ! More than two thousand stocks hit bottom, unprecedented!
The article goes into a long discussion of factors affecting the market, central bank policy, IPOs, etc.
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An investor poll in iFeng with more than 200k respondents: 沪指再度重挫7% 现在能抄底么
Finally, the reasons why the market dropped. iFeng: A股重挫8%幕后六大黑手曝光 机构称或调整50%
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1. 90 billion yuan flows out of A-shares
2. Two days of selling through the Shanghai Connect
3. Market tumbled in the last 15 minutes of trading on Thursday
4. Morgan Stanley said do not buy the dip
5. UK strategist says Chinese market will fall 50%
6. Official media stopped rebutting foreign media crash talk, simply repeated the “slow bull” argument
7. PBOC restarting of reverse repos lowers odds of a rate or RRR cut
8. Regulators continue to cut leverage
9. Technical analysis pointed to a decline
