Yesterday saw a huge rout on Chinese equity markets, with the CSI 300 Index dropping 7% after failing to pause at the 5% limit enacted earlier. Scenes were similar on the Shanghai Composite, where trading was halted after lunch when it went into meltdown as well:
Monday morning quarterbacking – or Tuesday as it were – to work out what the hell happened as been rife across the interweb.
This could be a response to the very poor NBS manufacturing data that came out on New Years – now down 5 months in a row – that was followed up by the Caixin Manufacturing PMI result which showed a 10th month of contraction in one of the world’s most important economic powerhouses.
Technically, it all started at the opening bell as stocks dived below the crucial 3500 point level and then as the vast majority of individual traders (some 80% of the market) stepped in to liquidate, stocks tumbled through the automatic 15 minute lock circuit breaker at -5% before triggering a total shutdown at -7%:
The daily uptrend line from the terminal low at 3000 points has been firmly broken.
As you can see from the second weekly chart above, this is the terminal phase of a bubble market that Chinese authorities have tried in vain to stop deflating. The bubble launched in mid 2014 and quickly doubled and then some in an epic ride that sucked in many small investors moving away from flatlining property markets.
This is not an isolated incident, as much as Chinese equity markets are rigged and far from transparent. Its a sign of broadening weakness in the China economy. More from Bloomberg where it could get uglier rather quickly on the back of removal of a selling ban:
China’s first economic reports of 2016 showed a series of interest-rate cuts and increased fiscal stimulus have failed to boost flagging growth by the nation’s manufacturers. The private Caixin China Manufacturing purchasing managers’ index decreased to 48.2 last month, down from a five-month high of 48.6 in November. An official PMI reading released on Friday also showed a contraction, while a gauge of services rose to the highest since August 2014.
Traders are “bearish” after the manufacturing index readings, Wong said. “Investors are also concerned that a removal of major shareholders’ selling ban would weigh on indexes.”
Goldman Sachs Group Inc. estimates the sales ban — imposed at the height of last year’s equity rout — kept $185 billion of shares off the market. Technology companies are the most vulnerable to a sell-off once the restriction is removed after they led a rebound since the benchmark index’s August low, according to Baptized Capital.
The result has sent a shockwave through Western equity markets with US stocks down 2-3% overnight after broader losses in Europe, with the DAX down over 4% – I’ll have more on this in my Macro Morning report shortly.
Its going to be a fun day on the ASX200…
Update: an interesting analog comparison from Investing in Chinese Stocks with the other great bubble, the NASDAQ tech bubble
