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Screenshot of a breaking news alert e-mail from Q2 2017
Yesterday was another bleak day for China’s two stock exchanges, namely the Shanghai Composite Index which fell by just over 8% and the Shenzhen Component which was down almost 5%.
This morning, the Guardian reported that within ten minutes of trading, more than 1,000 shares across China’s two stock markets had dropped by the daily limited of 10% and had their shares automatically suspended. About 1,400 companies, or more than half of those listed, filed for a trading halt in an attempt to prevent further losses.
The initial cause of the depreciation of stock value was widely reported to be attributable to Premier Li Keqiang having omitted certain financial information from a speech, however China is a very efficient and highly organized, advanced nation and mistakes are very very unusual.
Whether this was done in order to influence the prices of companies, all of which, under the communist system, have substantial government ownership is a matter for consideration. Recently, LeapRate reported that Mechel, a vast engineering conglomerate in Russia which had amassed vast debts, the major liability being denominated in RUB. The Russian government, at the time of releasing of Mechel’s annual report, instigated a 17% interest rate level, causing the Ruble to depreciate rapidly. As the ruble plunges, the debts plunge too.
Mechel owes Gazprombank RUB 26.8 billion and USD 1.4 billion; it owes Sberbank RUB 61.8 billion and EUR 29 million; the debts to VTB amount to RUB 53.7 billion and USD 100 million.
When the ruble plunged after the move in rates, the debts fell accordingly. Additionally, Mechel had the right to offer its shares on discretionary auctions, thus defending itself from selling its shares at the close-to-zero prices. Mechel made use of those discretionary auctions on the Moscow Exchange on December 19th.
No one wants a company the size of Mechel to go bankrupt. Not because of the potential loss of employment that could blight the company’s 70,000 employees, but because some of the biggest banks in Russia will be left without their loans repaid. Mechel’s astute accountants are all to aware of a solution which could end the company’s woes, and wants to convert all of its debts into rubles. This way the next ruble slump will solve all of its credit problems, effectively causing the debt to plunge, then convert it all into US dollars.
China’s commercial system is closed, and information is not publicly available, nor is it possible for Chinese businesses to choose their own corporate direction, as there is a government department for every purpose, supplanting management consultants and lawyers which are non-existent.
The People’s Bank of China stated that it was assisting China’s Securities Finance Corporation (CSFC), the national margin trading service provider, to acquire liquidity in an effort to steady the stock market.
It said it would do this through measures such as inter-bank lending, mortgage financing and floating financial bonds. It said it would keep a close watch on the market and continue to support the CSFC and guard against systematic and financial risks.
Recently, LeapRate conducted extensive research into the large scale introducing brokers, money managers and representatives across China, some of which operate $200 million business with vast amounts of assets under management, and the unanimous conclusion with regard to preference for asset classes was that Chinese investors ONLY want to trade FX.
Therefore, most IBs and money managers across China with large portfolios under management concentrate solely on FX and look for Western companies, mainly with FCA licenses, that have been established for more than 15 years, and are publicly listed on a stock exchange. There is very little interest in Chinese stocks, even in Alibaba or Baidu, and Chinese investors want to be able to be in control of their own investments, and not rely on Chinese corporate performance, or stock traded on government-controlled stock exchanges.
A spokesperson for China Securities Finance Corporation also said it would purchase more shares of small- and medium-size listed companies. It is these companies that have suffered the biggest losses.
Christopher Balding, a professor of economics at Peking University said that while it was not possible to know exactly why so many companies had suspended trading, a large number were doing so because they had used their own stock as collateral for loans and they want to “lock in the value for the collateral”.
Ayako Sera, a senior market economist at Sumitomo Mitsui Trust Bank in Tokyo, said: “Today is all about China, with Greece in the background now that it’s been given a new deadline. Shanghai’s early losses were like a cliff-dive, which had a huge impact on investor sentiment.”
Previous measures taken over the weekend by the Chinese government in an attempt to stabilise the markets appeared to have been unsuccessful. Analysts said the falls looked set to continue. Balding said: “I don’t see it getting better. There is not going to be a turn around within the next week or two.”
“It probably has a long way to go. Margin loans basically rose much faster and they are not falling nearly as fast, margin debt is not falling nearly as fast as the market is falling. What that is telling us is that there is a lot of stock that needs to be sold that hasn’t been sold yet.”
Photograph: Andrew Saks-McLeod discusses what asset classes Chinese investors look for, and that FX is absolutely prominent, with Chinese investors looking for publicly listed, FCA regulated companies, with over 15 years in establishment. Featured Image courtesy of The Guadian