China heads for the panic room

When authorities say ‘there is no need to panic’, you should take it with a pinch of salt and be a little panicky. However, when they warn of panic sentiment, it may be a good idea to take them seriously.

China data board
Source: Bloomberg

Ironically, Beijing’s latest bid to calm the market had the opposite effect. It is quite clear there is a massive deleveraging process underway now and the reality that close to 50% (Bloomberg calculations) of A-shares had suspended trading did not help sentiment.

The concerted action taken by the Chinese regulator and the financial sector did not stem the stampede. This tells me two things - either what they have done so far is still quite inadequate or the emotive tone in the current stock slump is too overwhelming to listen to reason. I believe it’s a combination of the two.

The panic is spreading and authorities appear to be grasping at straws to hold back the tide. We have seen State Asset administrator urging state-owned companies to buy their own stocks to stabilise share prices and pleading them not to sell during this massive selloff.

Despite the strong downward momentum, Goldman Sachs actually remain bullish about Chinese stocks. Before you dismiss them as a basket case, note that their bullish outlook is premised on a 12 month horizon, which is probably considered long term.

They expect CSI 300 to rebound 27% over the next 12 months. Currently, CSI300 is down by around 30% from their 8 June peak. In the longer term, I feel that Chinese equities are still on an uptrend. But in the short term, the trend is down and we have seen every rally over the last three weeks being immediately sold into.

Traders are using any bounces as a chance to cut their exposure. Volatility has increased to dramatic levels. Retail investors are naturally very nervous about the whole thing and emotions are likely to get the best of them. This means any rallies in the market should be short-lived, which suggests downside risks over the short to medium term.

At best, we may see a stabilisation as the policy intervention and private sector support filter through the stock market. There are concerns over the potential social fallout if individual investors lose their savings or fall into debt from margin trading. We see a very small likelihood of that happening as equities only account for about 20% of the household financial wealth. A big chunk (54%) still resides in bank deposits.

Meanwhile, risk aversion were evident across Asian markets amid contagion worries over the Chinese stock rout. It feels that they are now having way more impact on a regional mood than a week or so before. Part of the reason is the increasing worry by the Chinese authorities. Ongoing Greece crisis also dragged on sentiments.

The Nikkei fell 2.6% and closed below 20,000 for the first time in nearly two months. ASX 200 dropped 1.8%, as global commodities took a hit. We continue to look for headlines out of Greece.

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