China Focus : The 7 Year High And Biggest 7 Year Weekly Drop

Nice play around 7 as we hit the 7 year high in chinese stocks last week to suffer the biggest 7 year weekly drop this week. And no one is batting an eye lid which makes stocks a highly volatile investment option that is none too comforting for international investors.

That is because 12 month Gains(ONLY)  in China > Entire Market Cap of Japan. And if the market has topped US$ 10 trillion, what is a 10% drop ?

Just check out the 30 day hist volatility of the SHCOMP running at 42.72% !, a RED ALERT number that equates to DO NOT TOUCH for folks that understand the meaning of risk.

shcomp 30d his vol



mainland markets have become too speculative for international money managers to take part. Swings in the Shanghai gauge over the past 30 days are bigger than every other market worldwide except Greece, according to data compiled by Bloomberg.

“It smells like a bubble, it looks like a bubble, and it walks like a bubble,” Morilla-Giner said in an interview on Bloomberg Television in London. “Steer clear, that is the trade.

Thus, hedge funds have been thriving unlike the connotations of their name (hedge = risk seeking), and it is reported that 5,000 new Chinese themed funds have been launched in less than 3 months which means the trend is likely to continue.

Going forward, I extracted this from my friend and sometimes contributor, Zico, and this is what he has to say about the China story and the politics behind situation for the MSCI.

“Whatever the reasons that the MSCI people say about the reasons for excluding the A shares, the “elephant” in the room is worth more than US$10 trillion, at least that is before the current correction which just so happens to coincide with the MSCI announcement. Just for perspective NASDAQ is about US$7 trillion and the NYSE is about US$20 trillion. So how can one not begin to buy into conspiracy theories.”

The other main reasons given for the correction besides the MSCI story – IPOs.

“(Bloomberg) — China’s benchmark money-market rate posted its biggest weekly increase in six months as new share sales and tax payments drained funds from the banking system.

Initial public offerings this week locked up about 6.7 trillion yuan ($1.1 trillion), according to a Bloomberg survey. The People’s Bank of China decided against rolling over some medium-term loans, people familiar with the matter said Wednesday.”
And some talk of hikes in margin requirements that would impact the retail investors appetites ……
So much for interest rates because the 1Y generic CNH govt bond is trading at its lowest yield in 6 months giving us little to worry about on the currency as well as bonds front.
1y generic cnh gov
And we should continue to stick to the safe stuff as new scandals plague the  markets daily.
This week we have Shanshui Cement in trouble as their largest shareholder seeks to oust its chairman which would lead to a technical default and a breach of their change of control clause for their bond issues.
The company has 2 USD notes outstanding totaling US$ 900 mio and their 5Y bond price has dropped some 14% from a month ago.
SHANSHUI USD 7.5% 03/2020 84.70/85.90 (11.82 /11.45%) 1MTH AGO 99.60
SHANSHUI USD 8.5% 2016 98/98.75 (10.8/9.9%) 1MTH AGO 102
And we have another CEO succumbing to potential corruption charges, this time from China Aircraft Leasing Group (1848 HK, 34.98% owned by China Everbright) as their current CEO resigned while on vacation (better start monitoring their holiday schedules at this rate !) causing share price to plunge 12%. Fortunately, no bonds are affected except for a HKD convertible issue.
china aircraft leasing share px
This chart adds to my conviction that you cannot be too sure on investing in China unless you happen to have ears, eyes and nose on the ground … if you understand what I mean, even for govt linked companies – the SOEs although I am not sure if Italy can manage to indict the Bank of China and 297 people for money laundering ??
At least the rest of the bonds are doing well, including the real estate names and there is no Santayana moment in sight !
Good luck and leaving with the indicative prices.