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China buckles finally

The struggle between buyers and sellers in Chinese markets have been rather fierce, since the 13% plunge last week.

Hong Kong Museum of Arts
Source: Bloomberg

Although buyers overcame sellers in the first two sessions after China resumed trade from a long weekend, mainland stocks finally buckled on Thursday as sellers aggressively pushed prices lower.

The A50 and CSI 300 fell 2.8% and 3.6% respectively, but it is the ChiNext that captured the attention.

The ChiNext tumbled more than 5% today, which saw the index flirt with bear territory.

From the record highs on Wednesday 3 June, the technology-heavy index was down almost 20% as investors became worried about the lofty valuations in tech stocks.

Likewise, the CSI 300 information technology index plunged over 18% from its Tuesday 2 June peak.

Dimmer prospects of more monetary stimulus may have also weighed on China shares, as the PBOC undertook open market operations today, for the first time in two months.

The central bank auctioned CNY 35 billion ($5.6 billion) worth of seven-day reverse repos at 2.7%. I feel that the use of a less powerful liquidity management tool reflected the authorities’ view that more monetary easing is not necessary to address the seasonal liquidity crunch.

For some background, money market rates commonly rise, which signalled tighter liquidity, ahead of month-, quarter- and year-end due to banks’ regulatory liquidity requirements. This sees institutions hoard cash as they approach these periods.

Given that the monetary authorities will likely keep borrowing costs from climbing excessive, we could see PBOC to continue doing reverse repos for a while, which would reduce the need for more powerful measures such as a cut in the reserve requirement ratio (RRR). As I have pointed out before, recent China economic data indicate signs of stabilisation in the economy, which may negate the need for more stimulus.

Meanwhile, margin financing continues to ease, with outstanding margin debt on the Shanghai Stock Exchange falling for the third straight session on Wednesday. Margin loans have fallen 2.9% to CNY 1.44 trillion on Wednesday 24 June, from the record highs of CNY 1.49 trillion on Thursday 18 June, as regulator and brokerages tightened margin lending rules.

Greece to remain as headline risk

The latest twist in the Greek bailout talks is not so much of a surprise if you understand the gap between the expectations of the troika and Greece. The IMF is insisting on more spending cuts and fiscal consolidation through wage and pension reductions rather than tax hikes. Additionally, major disagreement on debt relief also hamper the forging of a consensus.

As things now stand, missed payments to the IMF in June is unlikely to see the ECB closing off emergency liquidity to Greek banks. However, a default on marketable debt would put Greece closer to an exit. Specifically, Greece has to pay €3.5 billion to the ECB on 20 July.

Nonetheless, if there is no deal and Greece totters past Tuesday 30 June without being in a bailout programme, the ECB could still decide to re-look at its collateral rules concerning the Emergency Liquidity Assistance (ELA). The upshot is that the immediate impact of missing a payment to the IMF on Tuesday 30 June is likely to be limited.

 

That said, the lack of progress on the negotiations will still drive market sentiments in the short term, leading to greater volatility in the capital markets. The euro once again turned resilient, upon ‘bad news’ out of Greece.

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