CHINA FOCUS : DON'T DIE OF IGNORANCE OR IN THE HURRICANE

I am not sure why I ventured into the Chinese market which I said I would not touch for the past 3 months as red alerts flashed in the volatility numbers. It was Greed la ! After 3 weeks, it was about time and my heart goes out to those who had bought the week before for the same reasons.

Yes. We have a new record for the 1 month ATM vols for the SHCOMP – 60.9%.

But at some point, risk-reward (aka GREED) steps in for a government that will pull out all the stops to maintain a rally.

 

A neat biggest 2 day rally since 2008.

There are reports and rumours of media blackouts, especially on suicides; major shareholders of state owned enterprises have been “forced” to buy their own shares and that bosses then forced employees to buy calling it employee stock ownership programmes; Internet laws are coming into place and web connectivity will be controlled during times of crisis; Some bankers and analysts onshore who have made any comments re : bubble have vanished and expatriate ones are fleeing the country.

 

Until now, we have no idea why the markets collapsed so swiftly with most articles gloating the “I told you so”.

Perhaps it was because the government pushed through too many changes too quickly, and their attempts to reform their markets backfired ?

To grow equity markets as a source of financing for corporates to reduce the reliance on loans, bonds and shadow banking, stock markets rallied to allow expensive IPOs to push through and transferred the risk to investors ?

The main beneficiaries would be the ….. ?

Some lessons.

1. I will bet that this SHALL NEVER HAPPEN AGAIN.
2. China has lost a lot of credibility that will take much time to regain.
3. MSCI inclusion hopes will be put on back burner.
4. Growth will take a big hit in consumer spending, car sales, real estate sales, investment plans, offshore expansion plans and I cannot name them all. http://www.bloomberg.com/news/articles/2015-07-09/already-weakening-china-s-economy-faces-fresh-blow-from-stocks

As I said before, there will be ripples and repercussions because you do not have an earthquake without an aftershock or two.

“Shanghai: Wang Yuewen, general manager of Chongqing Chuanjiang Shipping, a company operating a cargo shipping business on Yangtze River, committed suicide by jumping off a building on July 4. His wife Ren Zhonghui, vice general manager of the company, is also suspected to have jumped into Yangtze River after leaving a suicide note at home and gone missing since……According to the website of the company, it planned to expand its fleet size to 100 vessels, and shipping capacity to 30,000 teu by 2017, and go public in three years to bring in new investors.” http://splash247.com/chongqing-chuanjiang-shipping-bosses-commit-suicide/

Going forward, liquidity will be a major issue with over half the market still suspended and banks like Nomura and Daiwa halting redemptions on their China funds.

Investors are zoning in only on the A50 now because they are the biggest and safest. The H-shares will perhaps continue to underperform as they remain the avenue to short outside of China. The premium stands above 100% as of Friday compared to the 70-80% we have seen for most of the year. http://www.bloomberg.com/news/articles/2015-07-09/hong-kong-hostage-to-china-rout-makes-stocks-too-cheap-to-ignore

And though we have the government and major brokerages declaring that sentiment driven panic is over as the Chinese bull kills foreign short-sellers, I would prefer not to die of ignorance in the process.

It is time to sell those bonds and buy those shares !

And for those USD HY bonds that aren’t faring too well, don’t expect too much sympathy buying as those real estate names got bashed lower. Newly upgraded names (Ba1 by Moody’s) such as Country Garden 7.5% USD 01/2023 shedding some 3-4 cts into Wed (from 101 to 97) before closing the week 99.50/100.50.

So much for dying of ignorance, I would not want to be in the way of the hurricane as well. For we have come to a perfect ending to the turbulent week in China with powerful Typhoon Chan-Hom (predicted as the worst since 1945) expected to make landfall in Shanghai later today and over 800,000 people have been evacuated so far. http://www.bbc.com/news/world-asia-33491507

So much for playing God, I think there are limits to the extent they can manipulate the weather.

I repeat some stuff I wrote last week. https://tradehaven.net/market/fx/china-focus-trade-like-monkeys-run-like-lemmings/

World Bank censures China for interfering in financial sector

“The state has interfered extensively and directly in allocating resources through administrative and price controls, guarantees, credit guidelines, pervasive ownership of financial institutions, and regulatory policies,” it said.…. “the main root cause” for China’s fragile financial sector, which the bank described as unbalanced, repressed, costly to maintain and potentially unstable.”

Leaving with the indicative bond prices.