China’s ‘Black Wednesday’?

Yesterday I put these stats out to highlight just how gigantic the moves in China really are and the value that has been lost.

Source: Bloomberg

China has now lost US$4.2 trillion in market value in just 17 days:

  • In 2013 the S&P had its third best year on record, adding US$5 trillion in value over 12 months. China has lost 84% of that in just 17 days.
  • That same value is the equivalent of losing over 65% of the total value of the Nikkei
  • It’s just over the total value of the CAC or 3.6 times the total value of the ASX

What made yesterday even more disturbing was the final hour of trading.

A50 was limit down for the day. However, once it came back online after the mandatory closure it limited down immediately, taking off a further 5% to end down 15% for the day. The index went back into the mandatory closure period with only offers on the depth screens.

China A-shares have declined 28% form the June 12 high. The A-shares are still up 15% year-to-date, but it has now erased all the gains in March and a little more.

What’s more, over 50% of stocks are now suspended due to either limiting down or a trading suspension request - the true position of China’s market is now hard to define.

It also begs the question – how do they reopen those halted markets? A market would normally punish a share coming back online in a situation like this – with over 50% of shares halted and market theory suggesting selling will come on the open, how do they limit the damage?

MSCI rejected the A50’s bid to enter the MSCI emerging markets index in June due to three factors: regulation (share ownership), liquidity and access. Two of these are currently creating the havoc we’re seeing.

The fact the CSRC cannot control the decline through regulation and the PBoC is throwing money at the situation suggests the MSCI was right to hold off. To be blunt, this shows the immaturity of the Chinese market – there is a long way to go here.

I have also been asking the question – has this event created such psychological scarring that it puts an entire generation of Chinese retail investors out of the market?

The ‘Street Talk’ is amazing: talk of not understanding the rules, not being able to withstand the volatility and seeing fortunes made and lost in an instant continue to filter out of the mainland.

Fundamentally, China is coming back to a point of attraction – the monstrous P/E ratios have come back to more realistic levels. However, the bursting bubble means value is unlikely to factor into thinking in the interim. The repercussions haven’t completely played out yet.  

Commodities contagion

The risk from Chinese equities markets is clearly impacting commodities markets.

  • WTI has fallen over 12% since the start of the decline on Chinese markets. Half of that has come this week. Clearly the decline is linked. However, oil has also seen OPEC production surging and US rig counts ratcheting back up.
  • Copper is the interesting one. In the past when policy was easing, copper has seen temporary strength. This time no strength has been seen and being underweight Chinese commodities equities plays in an easing period has been to your detriment. This time, however, that trend has been reversed.
  • Iron ore has just logged its worst trading day on record, down 10.1% to US$44.59 a tonne in to Qingdao; a yearly and a five-year low. Supply hit a record last week.
  • The steel price in China is now cheaper per tonne than cabbage.

Ahead of the Australian open

The AUD bounced back after reaching a new six-year low yesterday, crossing into the 73 cent handle. However, at 74 cents the risk-off is clearly holding true and the trend over the past three months is to the downside.

China’s CPI and Australia’s employment print will be key to currency movements today but the risk around commodity exports mean the AUD has further easing to come in the longer term.

We are currently calling the ASX down 44 points to 5425, adding to yesterday’s 2% decline.

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