Deleveraging wipe over $1 trillion off Chinese stock markets

The recent rout on the China equity markets wiped off $ 1.2 trillion off the total market capitalisation, from its peak of $ 10 trillion on Sunday 14 June. And we have not taken into consideration today’s plunge. 

Victoria Harbour China
Source: Bloomberg

It turned out that Friday is no longer a magical day for Chinese equities, given the sharp losses that was seen on two consecutive Fridays.

The sell-off was across the board, with blue chips, and smaller-cap alike decimated. The CSI 300 pierced through the 4500 support to reach a 10-week low, diving 7.8%.

Only the ChiNext fared worse, plunging almost 9%, and well within bear territory. The technology-heavy index have plummeted 27% from its peak on Friday 5 June, and closed below key 3000 handle on Friday.

If you are a speculator, then you may do well to heed Morgan Stanley’s advice of ‘don’t buy the dip’. The investment bank said that ‘the balance of probabilities is that the top for the cycle on Shanghai, Shenzhen and the ChiNext has now taken place’.

While it may be tempting to point at the protracted Greek bailout talks as a possible reason for the decline, the truth is China is more or less orbiting in its own universe. A more plausible reason driving the bears is the unwinding of margin trading or deleveraging.

We have seen the outstanding level of margin debt, on the Shanghai Stock Exchange, fall for the fourth-straight day on Thursday, and it will not be unreasonable to expect another decline today. Increased equity supply, weak earnings growth, and lack of activity on the stimulus front compounded the sell-off.

Although I continue to be optimistic about the longer-term trend of the China markets, it’s clear that we are in a sharp correction phase. A shift in sentiments may materialise against the backdrop of deleveraging. This would precipitate a deeper correction. On that note, I agree with Morgan Stanley’s assessment. It will certainly not be wise to buy on dips now, given the intense downward momentum.

What will be interesting is how the Chinese state media will respond, or if we see any official statements from the authorities. The state-run newspapers have published front-page commentaries asserting that the fundamentals underpinning the bull market have not changed, in attempts to soothe jitters.

As the authorities have been reluctant, to unleash more monetary easing given the backdrop of a stabilising economy, they may resort to more verbal intervention to calm frayed sentiments. In the meantime, more bouts of extreme volatility are here to stay during the adjustment period.

Singapore banks lead decline

Local banks led the fall in the Straits Times Index (STI) on Friday amid renewed concerns over the Greek situation. As of 4.00pm, DBS, OCBC, and UOB posted more than 1% drop in their share prices.

Sentiments were also pressured by the carnage of Chinese stocks on mounting worries over increasing signs of deleveraging. Nonetheless, the STI remained bounded in the 3300-3350 range, as the market lacks conviction to push the index in either direction.

Noble is an anomaly, plumbing over 3% higher as of 4.03pm, with investor confidence seemingly supported by the recent spate of share buybacks and vote of confidence by a large institutional shareholder.

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