Shortly after 1042am local, Chinese stock futures (CSI-300) flash-crashed over 12.5% on extreme heavy volume (while the cash CSI-300 remained unch). This move erased 3 months of gains but within 1 minute was back in the green with stocks up over 2.5%. The shocking collapse, exaggerated by a major lack of liquidity, was made more surprising by the fact that the last week has seen a record short position in the major Chinese stock ETF. Simply put, the heavy hand of market-central-planning has erased any and all depth in futures markets and positioning has become so tilted that price vacuums are likely to continue to occur.
As Bloomberg notes, the swing follows a similarly unexplained tumble in Hang Seng China Enterprises Index futures in Hong Kong on May 16, a move that added to nervousness over the prospects for Chinese stocks amid slowing economic growth and a weakening yuan. The CSI 300 has dropped 16 percent this year, versus a 2.2 percent gain in the MSCI Emerging Markets Index.
“It looks like a fat finger,” Fang Shisheng, Shanghai-based vice general manager at Orient Securities Futures Co., said by phone. “Liquidity in the market is really thin at the moment. So the market will very likely see big swings if a big order comes in. The order looks like it’s from a hedger.”
And for some context of what that move looks like longer term – it erased 3 months of gains instantly…
Still, positioning in Chinese Stock ETFs (FXI) has soared in the last week as volatility has been utterly suppressed in the major index…
The relative stability of the Chinese stock market in the last few weeks is oddly decoupled from the relative volatility in the Yuan and as Bloomberg notes, While the yuan’s losses have escalated in the past three weeks, the Shanghai Composite has been unmoved. The index has barely strayed from the 2,800 level amid speculation state-backed funds are preventing further losses, helping send 30-day volatility on the gauge to its lowest level since December 2014.
Some investors may be betting China’s domestic equities, known as A shares, will fall further if yuan losses deepen, according to Sam Chi Yung, senior strategist at South China Financial Holdings Ltd. in Hong Kong.
“Investors think there is some risk in A shares," the strategist said. “If the yuan keeps falling that would affect the value of Chinese shares."
But, as the following chart shows, this is a record level of relative short interest…
Seemingly creating the perfect opportunity for a plunge protection team to squeeze stocks higher… proving the Chinese economy is fixed once again (or is this time different, like in 2008 and 2015)
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