2015-08-18

Why Chinese Stocks Fell on Tuesday and What Sent Futures Limit Down

Stocks pulled back from the 4,000 level. When the Shanghai Composite hits 4,500, normal selling can resume, so unless there's a bullish market pushing stocks towards 5,000 or higher, investors are likely to rush for the exits. Beyond the 6.2% drop in Shanghai, the August CSI 500 futures contracts fell 9.7% on the day. The September and December contracts declined 10% on the day. Below is the December contract.


The best explanation for the drop I have found is a series of articles appearing on Monday which called current market bailout efforts "unconventional" policy and was interpreted as the government preparing to exit. These articles are responding to a CSRC statement on August 14: China securities regulator says market forces to play bigger role.

Wall Street Knowledge summarizes the articles here: “非常规”措施有序退出 A股走出“救市”时代. Below they are listed, with the pull quotes from the WSK article.

In China Securities Journal, an opinion writer said:
previously used to stabilize the stock market "abnormal" emergency measures will be adjusted, A-share market will play a more independent role of regulation.
The article headline in English is "Market Regulation Will Be Clearly Strengthened (市场自主调节作用将明显增强)

Shanghai Securities News published a front page headline story: 有序调整应急措施 让市场回归自主调节 (link goes to shot of front page); text 上证报:有序调整应急措施 让市场回归自主调节. The headline says an orderly adjustment of emergency measures will allow the market to return to self-regulation. Discussing what the latest CSRC statement means:
the core principle has taken a new step, the better to restore the functioning of markets, the role of market mechanism, and gradually reduce the role played by emergency measures, let the market run its own internal stabilization mechanism and laws gradually back on track.

China Securities Journal also published a front page headline story: 维稳政策渐次调整 市场力量逐步恢复
According to market development stage, an adjustment to the maintenance of stability policies is necessary. Experience of developed countries shows that until after the market resume normal operation, the maintenance of stability degree of involvement of funds on the market will be weakened, after all, stability maintenance funds into the market just to help the market return to stability, not in order to push up the stock, policy intervention in the market is only temporary and not permanent action, if long-term interventions with the visible hand of the market, restore market mechanism itself would be difficult to shape, the idea of ​​opening up the capital market will be out of the question.

Securties Daily published an opinion piece: 今日视点:要让市场发挥自我调节作用
Under the policy continued to force the action, the current market has come out abnormal fluctuations "extraordinary period", and gradually return to self-regulation among the primary role of the norm.

The so-called "policy support" is not a permanent solution, the market and ultimately to its own role to play. Especially with the unusual fluctuations in the market by the severe fluctuations in the trend in normalized, we should pay more attention to its self-regulatory role to play, through deepening reform constantly improve the internal stability mechanism.

Guotai Junan also put out an analyst report stating bailout measures are neutral. The Wall Street Knowledge article that mentioned the report is "A Shares Enter Troubled Times" A股进入“多事之秋”
SCRC No. 21 in the first sentence of the text that is clearly stated: "The stock market ups and downs have their own operating rules, in general, the government does not interfere." At the same time he pointed out that the next few years margin company "is generally not market operations." This statement means that since the crash of the stock market, buy the largest institutions are long shift from short-term to long-term neutral investors. The market for the interpretation of these two policy signals of the current differences , but we believe that the recent market uncertainty might bring downward adjustment pressures.
The Google translate is a bit messy, essentially it says the CSRC statement indicates the government will not meddle in the market and shift by the "national team" institutions from short-term buying to long-term neutral investment is bearish for the market.

There's more discussion of these articles at the WSK article: “非常规”措施有序退出 A股走出“救市”时代

Finally, WSK also published an article on Tuesday, called Guotai Junan "Rashomon" (referencing the Rashomon effect). A股暴跌背后的国泰君安“罗生门”. Several sources interpreted the Guotai Junan report as being very bearish ("the bull market is over"), but on Tuesday, the firm denied these interpretations and said it was positive on the market.

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