Stock Market Internvention Sours Mood in Market

WSJ: China Stock Futures Signal Deeper Pessimism
Textbook financial theory says a currency devaluation such as the one China’s central bank engineered this week should support stocks by making them cheaper for foreign investors and lifting business prospects for local exporters. The Shanghai Composite Index has remained relatively flat since the yuan began sliding Tuesday. Stock stability in China should please regulators after their summertime battle to prop up shares.

Yet, the level of futures that trade based on Chinese share indexes tell a more negative story about investor expectations for Chinese stocks. CSI 300 Index Futures, which track an index of the 300 largest companies listed on the Shanghai and Shenzhen stock exchanges, continue to point lower.

On Thursday, the CSI 300 futures contract that trades on the China Financial Futures Exchange in Shanghai and is due to expire on Aug. 21 traded at a 1.5% discount to the actual index, while the contract due to expire in late September stood at a nearly 3% discount. A discount is a strong indicator that investors are bearish, traders say.
A quibble. When there is a major devaluation, or a hyperinflation, the price of stocks initially collapses in real terms because of the negativity surrounding the event. Marc Faber discussed this in his book Tomorrow's Gold: Asia's age of discovery. It is not a long period, but the losses can sometimes be substantial because investors are looking at an economic collapse. Then people realize the currency is going to devalue and holding anything other than currency is a good idea, so stock prices rebound. Being currency hedged is the best bet.

There's an explanation for why the futures are priced lower though:
The futures market discounts indicate China’s equity market is fractured, says one foreign fund manager. It reflects a desire to sell, he said, but “investors can’t sell stocks because it’s considered not patriotic.”
China's intervention into the stock market has turned the desire to sell today into a bearish signal six weeks out. If allowed to sell today, stocks would drop and the selling force would be spent. Buyers might move in immediately, or at least stocks would bottom. Instead, the buyers look at the futures and wonder.

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