Armageddon on July 17: Government Goliath vs Short-Selling Davids

An exciting week ahead, with a possible short-term top on July 17 if the government squeezes the index futures bears. More than one article is dubbing the week ahead a battleground for bulls and bears. Based on what has transpired in the past two weeks, I have to believe the government will go all out to win the week's battle. It will be a strategic error, but the politicians want a victory.
"July 17" Armageddon?

July 17 is the delivery date of the three main stock index futures contracts. Market participants predict that in the meantime, the turmoil will further continue, while July 17 will probably be the decisive battle of the match-ups.

In the current round of stock market crash, in addition to the strong level of deleveraging caused panic, there is a culprit behind the scenes with defying the government. That is, the use of stock index futures skillfully deflected the potential unrestrained malicious short sellers.

Of the three major stock index futures, the CSI 500 futures contract (IC1507) has become short "main short", every time it's the first down, sold the fastest.

A futures industry analysts, this is because the smallest IC1507 market vulnerable to capital controls, low operating costs. The IC1507 corresponding spot - small-cap stocks is also pre-or large. "Short of IC1507 force can be generated by market panic index linkage effects, driving other indexes down."

Hong Hao, chief analyst at BOCOM International also noted that during the plunge, IC1507 dropped more sharply than the SSE 50 stock index futures. "This is because small-cap financing mainly by non-broker channel, umbrella trust funds provided that they can buy the contracts on margin. The financing of large-cap index futures stocks is monitored by CSRC."

Pledged shares hang over the market:
Worthy of attention is, there is a risk of falling tipping point has not been lifted, the collateral shares of the largest shareholders.

Deutsche Bank analysts said that one of the reasons large numbers of listed companies suspended trading of shares is because along with share prices plummeting, the banks will sell pledged shares.

In May alone, equity pledges of listed company shares reached 366 times, 56 percent pledged to brokers, 17 percent pledged to banks. Nomura Securities estimates that the overall size of pledged A-shares is 500 billion to 600 billion yuan.

If the company's share price fell more than 50 percent, is facing the risk of forced liquidation. The intensity level will undoubtedly set off another round of stock crash nightmare.
There's a solution to that: ban the banks and brokers from selling the collateral.

iFeng: 分析:空头警报未除 7月17日可能将成决战中巅峰对决


  1. It's hard to see how the government can get itself out of this one without just nationalizing the entire stock market (by getting it into the hands of mega entities that are essentially arms of the govt). If it stops purchasing shares they will plummet back down - if it continues to gradually purchase shares then gamblers will front run everything up 10% and demand to be bailed out if the govt does not show up one day (and since its so levered, it'll be a risk to the financial system if they do not bail it out). It seems like they either need to let the market naturally collapse, or just nationalize the whole thing and be done with it.

    If they do not stop what they are doing then they have turned the stock market into a guaranteed entitlement program for all current speculators to exit at highly inflated valuations.

    I'm sure that if they nationalize it there will still be a fake market with fake prices so that they can continue their potemkin village claiming that they have the world's largest companies.

    I've seen some float figures around on ZH and FT recently but I do not believe that data to be accurate. The ~10 mega companies which have ~40% of the total market cap only have about ~2% floating and the rest primarily owned by the govt or ~10% foreigners. The float on the SH/SZ market I believe is actually quite small, and the margin / float figures we've seen recently I also deeply suspect are inaccurate (the margin is an even greater percentage of the float). They can easily manipulate this up as much as they want, but soon they will have nationalized the market - BJ can enjoy their investment in bogus internet and p2p lending companies.

    What a disaster.

    - Luke

    1. It's a total disaster. Xi, Li and the PBOC spent two whole years crafting a tightly controlled economic transition and they blew it up. To this point, the slowdown was contained and policy was proceeding at a steady pace. The past two weeks policy makers went completely off the rails.

  2. The govt fumbled its response for the first few weeks of the crash, but as soon as Xi and Zhou were on the plane to Russia the intervention became extreme with 2 days of nearly every stock up 10% (ridiculous). It makes me think that there are strong divides in the party as to what should be done - its possible that the overwhelming intervention was done without approval from Xi and that it could be a maneuver by a rival faction to gain power.

    Either way this is a big loss of face and power for Xi and from here on out the hard communists will forever remind him and the liberals of the failure of their stock market. Also this will greatly damage any foreign capital's interest in going to China - what portfolio manager is willing to risk his capital being seized in a Potemkin market or worse, get arrested for trying to exit a position?

    They've turned their bogus stock market bubble into something far, far worse than it should have been. They can delay the eventual financial "collapse", but the cannot avoid it.

    - Luke