Well, that escalated quickly

At the close of the Australian market yesterday (around 4.15pm AEST), there was no doubt China was having a bad day.

Source: Bloomberg

CSI 300 futures were down around 4.3% and A50 futures about the same. Cash markets were faring slightly better, with Shanghai down about 3.2% and H-Shares down around 3.5%.

In the preceding 45 minutes Chinese markets had seen several hundred firms halted for limiting down as they logged their second-worst trading day in history. Cash markets were down an average of 8.5% and the futures market hit the limits. And all this despite a war chest of cash designed to support the market at any cost, which is still in play.


Technical analysis could point to a rejection of the 50% retracement line of the June top to the July bottom. However, if that was the sole case, the selling in the morning should have been stronger.

Industrial profits were softer, down 0.3% year-on-year. This certainly was a trigger but the more closely watched industrial production numbers were back at 2015 highs last week.

Rumours around 4.30pm AEST yesterday had the IMF telling the CSRC that it will need to unwind its ‘market support’ measures over time. This was clearly another trigger for the sell-off.

However, you could argue, when has China ever listened to the IMF?

A counter to that is the fact China is looking to get into the MSCI and other world baskets. It will therefore need to satisfy the IMF, so just maybe this is a risk to the Chinese markets.

‘The fear’ seems to be other major issue. In the three weeks of calm since the 8 July bottom, there was always a lingering question: when will the authorities withdraw support funding?

Media reports that the government had started to prepare for the withdrawal of ‘funding support’ were categorically denied by the CSRC and stated that the commission will ‘continue efforts to stabilize market and investor sentiment, and prevent systemic risk.’

Conclusion: clearly the Chinese markets are unable to support themselves. The mountain of leverage and the risks of margin calls are hitting market stability. Interestingly, the CSRC has threatened jail time again for those conducting short selling. ‘Any malicious trading will be investigated and severely punished’, the report stated.

This is a recipe for disaster. Not having an avenue to cover margin is a systemic risk to market trading - if this is one of the major reasons for the sell-off, so be it. However, if you block this avenue, the talk of a hard landing in China due to the mountain of public debt will be transferred to the private sphere, and that is a more concerning scenario.

Ahead of the Australian open

Commodities continue to face unprecedented selling; crude remains the biggest concern and a 3.5% fall in Brent will not help the energy sector today as WTI locks itself into a bear market.

The industrial metals are the next worry as copper sinks further, along with nickel and zinc. I am currently fairly bearish on copper producers as the underlying commodity looks like it will stay lower for longer and the longer-term estimates are re-evaluated.  

Ahead of the open, the ASX is pointing down 38 points to 5551. However, considering it bucked the global trend to finish in the green yesterday, selling today may be stronger than the opening calls suggest. The clear lead will be the open of Chinese markets at 11.30am AEST.

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