China A-Shares on The Line

I posted on the Shanghai Composite earlier. ASHR is on its own line.

Geopolitical and Currency Depreciation Hedge

If the Taiwan Straits or Chinese situation greatly escalates, OTM puts on the China and Taiwan ETFs aren't a bad idea. My preferred vehicle for China is ASHR because it is the Mainland stocks most likely to be hit by sanctions policy. ASHR also opens up potential gains from currency depreciation of the yuan if the dollar takes off. I bought closer to the money for Taiwan, August puts, because as a tech-heavy fund and I think it could slide with the rest of the market. For ASHR, I went way out of the money into October. It is solely a hedge against a major geopolitical escalation that sends the ASHR fund down to near zero before it is suspended, like the Russia ETFs.

USDCNY still looks bullish and I see a similar formation to 2015 on CNYJPY.

Ignore the China Bulls

ZH: China Cuts Benchmark Loan Rate For First Time In 20 Months To Counter Economic Slowdown

China cut its benchmark lending rate for the first time in almost two years on Monday providing support to an economy showing strain from a property slump and sporadic coronavirus virus outbreaks, the SCMP reported. The one-year loan prime rate (LPR) – on which most new and outstanding loans are based – was cut from 3.85% to 3.8% at the December fixing, while the five-year LPR – which is a reference for mortgages – remained at 4.65%, according to the People’s Bank of China (PBOC).

..."The cut reinforces our view that authorities are increasingly open to cutting interest rates amid looming economic headwinds," said Xing Zhaopeng, senior China strategist at ANZ. However, he noted the decision to keep the five-year rate unchanged showed Beijing preferred "not to use the property sector to stimulate economic growth."

“[The] cut will immediately feed through to outstanding floating rate business loans and should also lead to cheaper loans for new fixed rate borrowers,” said Mark Williams, chief Asia economist at Capital Economics, who described the one-year LPR as “another modest easing step”.

“We expect a cut to the five-year LPR before long which will make mortgages slightly cheaper and help official efforts support housing demand" adding that he expects "a further 45 bp of cuts to the one-year LPR during 2022." The PBOC has already pushed banks to increase the volume of mortgage lending.

Let me ask you a simple question. If the Federal Reserve starts cutting interest rates would you agree with all these bullish statements, or would you think the exact opposite, that more rate cuts are coming because the economy is weakening? Analysts are bizarrely bullish on China all the time. Many Wall Street analysts are paid shills at times, but I think the China analysts are paid shills all the time because saying negative things about China results in cancellation of Chinese business. Almost no one with serious business exposure in China is going to tell the truth.

Additionally, emerging market earnings track Chinese interest rates. If rates are going down, emerging market earnings are going down as are emerging market stocks. It may be that China and emerging markets bottom first in this downturn as they have in the past. I will be keeping an eye out for that. But I'm not buying here because I think lower prices are coming.

China has been propping up EEM. Once China cracks, the dam breaks.

Gaps Away

China A-shares haven't broken down yet, but CAT and DE gapped past support this morning.

China Fears Trade War, PBoC Chief Yi Gang Says Market Stable

After the Chinext fell to a new post-2015 low and the Shanghai Composite hit slid 3.78 percent to a new 52-week low, PBoC Chief Yi Gang gave an interview to Shanghai Securities News.

Aside from signaling there's concern for the markets, the interview also tells us what is driving official concern: trade war. Trade only looks like the icing on top of a bearish picture though. Investors had three days to digest the threat posed by The Bubble's Revenge: China's A-Share Market is Littered With Pledged Share Land Mines Buried During 2015 Mania. They have been worried about pledged shares hitting the market as borrowers defaulted on loans.

They were also worried about a technical breakdown in the market (Chinese investors rely more on technical analysis than U.S. investors). I posted an article Darkest before Dawn or Sun Still Setting: Shanghai Comp Loses 3000 yesterday. The Chinese article referenced in the post argued the market was nearing a bottom, but that it might be "darkest before dawn." By the time I put it up, President Trump had announced he wanted more tariffs, but that article was up on the Chinese site before 8 AM Beijing-time and it had to be written at least hours earlier, if not the night before. In other words, investors in China were ready for a market drop or a test of the Shanghai Composite's 3000 level before the news hit. No doubt the tariff news rattled the market, but that's only one part of the story.

PBoC: 易纲行长接受《上海证券报》采访

Shanghai Securities News: President Yi, the Shanghai Composite Index fell 3.78% today. What do you think? ??

Yi Gang: First, financial market fluctuations are affected by many factors. Today's stock market fluctuates and is mainly affected by emotions. The surrounding stock markets have also experienced a certain degree of decline. Since it is a market, there will be ups and downs. Investors should stay calm and rational.

Absolutely true. The percentage is a bit large compared to U.S. markets, but China should be a more volatile market.

Second, China's current economic fundamentals are good, the resilience of economic growth has increased, the total supply and demand have become more balanced, and the growth momentum has been accelerated. This year, the renminbi is one of the few currencies that have appreciated against the US dollar. Based on such economic fundamentals, China’s capital market is in a conditional and healthy development. I am full of confidence.

The renminbi strengthened because of capital controls and possibly because China fears if they let the yuan depreciate as it should, the trade war will intensify. The rest is either true or narrative, depending on how you view it. China's macro economy didn't suddenly deteriorate on Tuesday.

Third, in recent years, domestic demand has driven the Chinese economy to increase. The degree of dependence on trade has dropped from 64% in 2006 to 33% last year. It is lower than the world average of 42%. The current account surplus also accounts for the proportion of GDP. In 2007, about 10% fell to 1.3% last year, and our economy’s ability to cope with external shocks has continued to increase. China is a big market with a population of more than 1.3 billion. The economic endogenous potential is huge and there are sufficient conditions and space to deal with various trade frictions.

I don't like the sound of this at all. Maybe he's bad at public relations, but it is bad news when the central bank starts talking about its current account. That suggests serious concern on the part of the central bank, markets, or both.

Fourth, the People's Bank of China has always attached great importance to the impact of external shocks. We will proactively make relevant policy reserves, comprehensively use various monetary policy tools, maintain reasonable and stable liquidity, and grasp the strength and rhythm of structural deleveraging to promote The economy develops steadily and healthily, and the bottom line of systemic financial risks does not occur.

The 19th National Congress of the Party has made full arrangements for the next step of reform and opening up. China will continue to unswervingly deepen reforms and expand openness. Reform and opening up will benefit China and the world.

Was the stock market falling because of trade fears or because of pledged stock landmines and deleveraging efforts? My tracking portfolio of Chinese stocks with heavily pledged shares fell 6.92 percent on Tuesday. How big a role trade played in the market drop on Tuesday, officials are clearly concerned about trade. And they're pushing the narrative of the strong renminbi. China has to keep the renminbi from depreciating. A rising dollar will trigger reflexivity that drives the dollar ever higher and the yuan lower, but it will also create narrative reflexivity as a falling yuan reveals weakness in China and investors turn more negative.

Chinese officials aren't demigods. The PBoC is one of the smartest, if not the smartest central bank in the world. It has the most policy levers of any major central bank. And yet, even it is subject to market forces. It's $3 trillion in reserves are spoken for many times in the supply of money and credit. China is not in a good position to fight a trade war and, whether I'm right or wrong about the U.S. intentionally puling China into the trade trap for geopolitical reasons, I doubt China cango more than a couple rounds of escalating tariffs before the dominoes start falling.

In conclusion, the tumble in Mainland markets was not because of the escalating trade war. It was a factor, but Chinese investors were already on edge because the market was threatening to break long-term support. There were serious concerns about defaults on loans backed by stock pledges. The decline in trade relations didn't help, but it is only one part of a much larger macro picture. Weakening growth, a rising U.S. dollar and deleveraging efforts have been chipping away at the markets. China has prevented the dominoes from falling before, but a trade war with the United States is one domino they have no control over. As I warned years before, China was running out of room to reform. As the supply of money and credit expanded, the room for error decreased. The threat of an external shock increased. The threat of trade retaliation was always rising as social mood declined around the world. If social mood continues to decline, "negative" (narrative) and negative (for real) events will hit with more regularity.

Don't Worry About the Decline, the Market is Calm

WSJ: That Calm Chinese Stock Market? It’s Engineered by the Government

Three years after a national uproar when Chinese stocks plunged by nearly half in just over two months, traders and brokers say regulators are increasingly stepping in to influence trades and make China’s markets appear less volatile, especially during political events when Beijing wants to project stability.

The steps, aided by advanced surveillance techniques to monitor traders, include warning brokerage firms to police trades that are out of step with government wishes and phoning investors directly when they act out of line.

The intervention is becoming more common just when Chinese equities are about to be included for the first time in a global stock index. MSCI Inc., whose benchmarks many investment funds follow, is set to add more than 200 Chinese stocks to its emerging-markets index on June 1. The introduction means more foreign investors will be exposed to a Chinese market that doesn’t move purely to the dictates of supply and demand.

“Never in over 25 years of watching the Chinese markets has the state been so involved and interfering in micro issues,” said Fraser Howie, an independent analyst and author of “Privatizing China: Inside China’s Stock Markets.”

A-Share ETF Over the Precipice

Shanzhai Composite Biggest Gain Since 2009; Not A Single Stock Drops in China; Morgan Stanley Mentioned As Possible Target of Short Selling Probe

With many shares still halted, the Shanghai and Shenzhen markets were almost completely limit up on Wednesday. Here's a screen grab, you can see there's only a few companies that went up less than 9%. There's nothing but halted shares below. Shanghai was up only 5.8% due to many components being halted. The average increase in traded shares was over 9%.

Here's the ChiNext.

Hong Kong H-shares were up huge. Some of the companies I posted two days ago were up 30%, as were many financial companies.

Yesterday's biggest government move: China Security Ministry to Probe ‘Malicious’ Short Selling
iFeng: 新华网：公安部核查昨日涉嫌恶意做空的10余家机构和个人

The Chinese article says there are 10 people and organizations being targeted. Morgan Stanley was unofficially mentioned by an official.

The central bank in charge of the newspaper hinted at Morgan Stanley and other international investment banks maliciously short A-share

Update: ASHR up 17% in U.S. trading as huge discount closes; HAO up 15%.

Discount List for Halted Market 2015-07-09

About 1400 stocks traded yesterday in Shanghai and Shenzhen and 900 were limit down. In U.S. trading, the ASHR ETF fell to 11.3% to $33.89, but the NAV only fell 7% to $38.05. ASHR is selling at a 10.9% discount.

Nearly all of the stocks on this list are not halted, and of the five that are halted, only one share was halted starting yesterday: Dongjiang Environmental (002672).

The average discount on the list was steady at 45%.

Hong Kong Panic Discount List for 2015-07-08

Foreign investors experienced full on panic Tuesday, assuming the Chinese economy isn't on the verge of a major crisis. The average discount on this list has widened to 46% percent, up from 38% only two days ago. H-shares were down across the board on Tuesday with many double-digit losses, while the financial shares in Shanghai were mostly up on the day. Yizheng jumps to the top of the discount list with an 80% discount after falling 16% in HK versus a limit down 10% in Shanghai. Investors in the U.S. mirrored the move in Hong Kong, sending ASHR down more than 10% at one point during the day even though the change in NAV only warranted a drop of 1.1%.

Below is a random list of shares chosen because of their large declines. Many companies have similar charts. In almost every case, the surge in share prices that began in late March has completely reversed, in many cases gains from the past year are gone as well.

Margin Call Clips A Shares, But Absolutely Not Insider Trading

Barron's: China Stock Meltdown and Inside Information

Some investors apparently had inside information about China’s brokerage firms preparing to clamp down on margin accounts. That crackdown was credited with helping torpedo Chinese stocks Thursday.

These investors pre-positioned for Shanghai’s stock market to decline by buying bearish put options on a major U.S. exchange-traded fund that tracks China’s stock market.

They are now counting their profits with glee. Some of the put options bought Wednesday have today nearly doubled. The investors profited by knowing that efforts to limit margin lending — investors borrow money from brokerage firms to buy stocks — would dramatically disrupt China’s stock market.

This isn't insider trading, for the same reason there isn't insider trading in currency markets: there are too many factors in play.

China markets plunge in record turnover as margin traders take fright

On Thursday morning at least three Chinese brokerages, including Guosen Securities Co (002736.SZ), Southwest Securities Co (600369.SS) and Changjiang Securities Co (000783.SZ) said they would tighten margin requirements.

"The brokerages are front running what the regulator wants to do," said Bernard Aw, an analyst at ING Markets in Singapore.

Haitong Securities (600837.SS) and GF Securities (000776.SZ) had made similar moves earlier in the week.

"This is no longer an individual case, but an industry-wide campaign," said Zhang Chen, analyst at Shanghai-based hedge fund Hongyi Investment. "Clearly, they got guidance from regulators, and this shows a change of government's attitude toward the margin trading business."

Here why it's not insider trading at all in this case. The change at GF and Haitong was announced on Tuesday morning Eastern USA time: 海通和广发证券上调两融业务融资保证金比例. The time stamp on the story is 2015-05-26 22:11:00.