FXStreet (Barcelona) – Tim Condon of ING, believes that failure to halt the panic in the Chinese equity space might damage the government’s image and set back economic reforms.
Key Quotes
“The Shanghai Composite opened down 7% today. By the lunch break it was down 4% for which we credit official buying. It’s clear that the weekend package of measures haven’t calmed the panic.”
“Like all of the sharp corrections since the rally began – we date the start at November 23 following the PBOC’s first policy interest rate cut – the latest one was triggered by a crackdown on margin lending. We thought the weekend announcement of PBOC liquidity support to the China Securities Finance Corp., a CSRC-owned company that lends to brokerages, had a chance of working; if a run on margin financing was behind the panic selling, liquidity support to margin financing could halt the run. However, the amount of liquidity support was not specified and the other support measures – the delay of approved IPOs and pledges to support the market by state-owned brokerages and mutual funds – have proved inadequate. The rout was so bad that by this morning half of China’s 2,808 listed companies had suspended trading in their shares.”
“At this point we believe halting the panic may require a bazooka in the form of a government backstopping of outstanding margin debt. Official margin financing fell from a peak of CNY2.3 trillion in mid-June to CNY1.8 trillion as of July 6. Assuming informal margin financing is equal in size, a market support package of around CNY4 trillion (about $650m) would, we believe, calm the panic.”
“The authorities are not there yet. Today’s press reports that China Securities Finance Corp. requested CNY500-1,000bn of liquidity support from the PBOC and will issue CNY80bn of bonds to raise capital. The State-owned Assets Supervision and Administration Commission also ordered central government-administered companies not to cut their equity holdings. We think the question is whether the authorities succeed in halting the market panic before it burns itself out, something we think would be associated with a Shanghai Composite index level of around 2,000.”
“Failure to halt the panic risks damaging the government’s image and setting back economic reforms, especially financial market opening and capital account liberalization, where post-Third Plenum reform progress has been greatest.”
(Market News Provided by FXstreet)