It was another volatile month for China’s stock markets as the unwinding of positions bought with borrowed money continued. At the beginning of the final week of July the Shanghai Composite faced its second largest sell-off in history, with the index falling a staggering 8.5% in one day. In the weeks prior to this it looked like Beijing may have succeeded in reinvigorating the market, but it proved short-lived and the index has since erased most of these gains.
In the past, policy easing in China has led to a rally in equities. In fact, the drive towards Chinese equities earlier in the year was primarily being driven by a reallocation of assets away from cash and property on the back of policy easing from both monetary and fiscal authorities, with trading volumes well above their historical averages; looser policy is making cash less attractive and debt cheaper, pushing investors into equities. Retail investors began opening share trading accounts at a record pace, using record amounts of leverage to buy into a rally they thought could never end.
When the house of cards came tumbling down many of these retail investors were wiped out, despite the best efforts of Beijing to try and keep the good times rolling. It used everything from conventional monetary policy, including numerous cuts to benchmark rates and the RRR, to actually baring selling by large corporates; the response has also included a ban on short selling and loans to brokerages from the PBoC. However, these measures haven’t been as effective as Beijing would have liked and have caused some capital to leave the markets, largely due to the increased risks associated with investing in manipulated markets.
One move that has been semi-effective, at least in the short-term, is direct intervention through government-backed funds. At the end of July it was rumoured that such funds were buying up bank shares, which comprise a disproportionately large part of the Shanghai Composite Index, in order to support the overall market. The PBoC has stated that it will continue to buy more shares as state-controlled media outlook issues stories attempting to reassure the public.
Q2 GDP numbers beat expectations
Earlier in the month, Beijing released China’s GDP numbers for Q2. The economy expanded 7.0% y/y last quarter, beating an expected 6.8% y/y growth rate and matching the prior quarter’s expansion. The good news continued with better than expected retail sales, industrial production and fixed asset investment figures for June. Nonetheless, these figures didn’t help China’s equity markets which are reacting negatively to good news which threatens the prospect of further stimulus from the PBoC.
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