China and Greece, a one-two hand combination

Any decent boxer would have practised a simple one-two (or jab-cross) combination, and most knows that your cross is from the stronger hand. The world has been preoccupied with Greece for a while now, and China is increasingly becoming the bigger concern (cross).

Hong Kong traders
Source: Bloomberg

This is because the market is resigned to fate, somewhat, that Greece is going to be negative for a while longer, while the country and creditors hammer out an agreement. Sunday is the ultimatum, but it’s really hard to tell when the final will be, when politics are concerned.

It does seem that the European leaders are really up in their arms over Greece’s defiance, and may have been pushed far too much to care if they stay in or not. EU Commission said recently that they have a detailed plan on the Grexit situation and ECB have floated the idea of humanitarian aid if Greece is kicked out of the euro.

While some may shrug this off as a scared tactic, it may be foolish to disregard the possibility that this time could be the final countdown. As our Chief Market Strategist, Chris Weston, noted it’s apt that the song ‘Final Countdown’ is from a rock band called ‘Europe’.

China pulls out all the stops

In 18 days, the Chinese equity markets lost $3.88 trillion. I had mentioned that Beijing will pull out stronger measures if earlier measures failed to stop the stock rout. It appeared that the stronger measures were a tad more draconian than I thought.

 The Chinese authorities announced a six-month ban on major shareholders, corporate executives, and directors from selling shares in the listed companies. Investors with stakes exceeding 5% must keep their positions. The CSRC justified the latest rule as a means to safeguard capital market stability amid ‘unreasonable plunge’ in share prices.

Yesterday, almost 50% of A-shares (Bloomberg calculations: 1331) had suspended their trading. The decision to approve the mass trading halt requests had actually worsened the panic selling. Furthermore, the trade suspension of many companies may have pushed selling to quality counters as mutual funds need to liquidate holdings to meet redemption claims. The piecemeal and non-transparency manner Beijing undertook to support the local equities so far does little to revive confidence at the moment.

What’s worse is the broader impact this has on China’s credibility in the financial system. The tough intervention hampered China’s ability to liberalise the capital markets, which is a lynchpin to the economic reform agenda.

Meanwhile, the recent measures are being augmented by the use of state Chinese media, with Bloomberg reporting Financial News as saying that ‘China is confident that normal trading on the stock market will resume’.

Economic Information Daily commented that ‘The turbulence in the stock market won’t lead to systemic financial crisis or have significant negative impacts on the real economy. Shanghai Securities News urged investors to be patient as the recovery will take time.

The persistent precipitous plunge in Chinese equities is spreading to regional markets, as market participants are mulling over contagion risks. Japanese and Australian stocks remained under pressure. Nikkei was dragged towards 19,000 as Japanese Yen gained strength amid risk aversion.

 The ASX was hit by falling mining counters, tracking plunging Chinese mining shares. Singapore was also affected, with the STI tumbling 1.7% and slipping below key 3300 support yesterday, led by the decline in bank stocks. 

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