China Trade Halts Locks Up $2.2 Trillion of Shares, Freezing Market

http://www.bloomberg.com/news/articles/2015-07-08/china-trade-halts-hit-2-2-trillion-as-state-intervention-fails

by sharetea • 11 years ago

180 128 11 years ago

bloomberg.com

jldugger2• 11 years ago

This is the sort of reason why I ignore the advice to put some trifling portion of my portfolio in emerging markets.

That and the high expense ratios.

Mikeb8510• 11 years ago

Had you bought a Chinese index share a year ago, you'd still be up around 100%...

iofj2• 11 years ago

Not really. The value of a thing is what someone else is willing (and able) to pay for it.

Therefore the value of a Chinese share, at the moment, is $0. In practice it's even negative, as you'll still be paying fees for your brokerage account.

powerapple• 11 years ago

I saw one up 13xx% in last 5 years, I would take the risk for that kind of return

redwood2• 11 years ago

But could you sell ?

dataker• 11 years ago

This is a fairly broad and inaccurate statement: emerging markets are way beyond China.

If you follow the booming countries until/if they burst you will make more money in that time frame.

forgetsusername5• 11 years ago

This is the sort of reason why I ignore the advice to put some trifling portion of my portfolio in emerging markets.

FXI, even after falling off a cliff, is returning 11% YTD, vs 1% YTD for the SPY. It has an expense ratio of 0.74%.

curiousjorge4• 11 years ago

so what's gonna happen tomorrow?

Mikeb8510• 11 years ago

Either another drop, or maybe a rebound? My money's on a drop, the SSE is only now crossing the 150 day moving average. But it won't last too much longer. I'd start freeing up some money to buy shares, but be very cautious for the immediate future.

curiousjorge4• 11 years ago

what makes you think it will rebound?

btw, god damn, we need a HN for traders.

PublicEnemy1112• 11 years ago

Looks like a big move is going to happen in US markets judging by afterhours being very in the red

wodzu• 11 years ago

It won't be contained in China, that of we can be sure of in todays global economy. If things will continue in the same direction we can expect at least a mild recession in China. That will have a large knock-off effect on the world economy. Slower growth in China will result in a slower growth everywhere else.

forgetsusername5• 11 years ago

If things will continue in the same direction we can expect at least a mild recession in China.

A recession? China's GDP grew over 7% last year. You think it's going negative because a stock bubble is retracing some of it's ludicrous gains?

iofj2• 11 years ago

The thing you got to wonder about is : they're trying to stop a panic. Is this going to stop the panic or reinforce it ?

My money's on reinforce. And it's (thankfully) out of China.

curiousjorge4• 11 years ago

well this is a clear signal that Chinese government has failed to control the stock market. I can't believe how naive they were thinking they could control something that is traditionally found only in non-command economies.

My guess is that they are going to come up with some bullshit like foreigners are driving down the stock prices, blame the Western devils for being homeless.

Well, it's not like people are going to go up to arms about it, it is a communist country after all, and we've seen how well Soviet Union did in keeping people in check even at the shittiest time.

VintageCool• 11 years ago

Foreigners can't invest in China's stock market.

adventured3• 11 years ago

They've already blamed Morgan Stanley, Goldman Sachs, and Soros for having a role:

"In the past few days, rumors have circulated on the Wechat messaging service that “international capital” — or simply capitalism itself — was attacking China. Goldman Sachs and the Hong Kong office of China Southern Asset Management were supposed to be profiting from short-selling the market – rumors that were later rubbished by the China Securities Regulatory Commission. On Thursday, Chinese media also implied that George Soros or Morgan Stanley might be to blame."

https://www.washingtonpost.com/blogs/worldviews/wp/2015/07/0...

imron2• 11 years ago

it is a communist country after all,

That's like saying the Democratic People's Republic of North Korea is 'Democratic'. Which is to say, it's totally not.

They might call themselves that, but for the last few decades China has been communist in name only. It's far more capitalist than any western country I've lived in.

joe_the_user2• 11 years ago

Yes,

You get the feeling that the people manipulating the markets are ignorant of the basic psychology involved here.

The proper way to do this is to officially say: "We believe in letting markets find their value and we believe they are sounder than many think" while unofficially pumping money in like crazy.

It gives me the impression the credibility of the "new Mandarin" approach of China's rulers is being torn to shreds. Not sure what the upshot will be.

deciplex2• 11 years ago

Not sure what the upshot will be.

China's rulers will also be torn to shreds?

gesman• 11 years ago

> “The market has failed,” said Hao Hong, a China strategist at Bocom International Holdings Co ...

In his view the market would "succeed" if it would always go up? Strategist? Seriously?

> ...failed to revive confidence among stock investors...

Depends on which side of trade you are. Investors who are put holders are not complaining ...

npalli• 11 years ago

In his view the market would "succeed" if it would always go up? Strategist? Seriously?

No, I think the Chinese genuinely believed the stock market would channel the excess savings that households have into private and public companies in a controlled manner. There is a genuine mismatch, the households save more than 30% with no place to invest while the corporate sector is burdened with debt thanks to overgenerous lending after the financial crisis.

What was supposed to be a gradual 15-20 year stock rise and conversion of debt into equity has become a boom and bust in a year or so. It also looks like a lot of small time investors piled on at the peak and might be looking at large losses. So kind of sucks for the small time Chinese investor who was looking for some growth (since they cannot invest anywhere else - property is already bust)

coliveira2• 11 years ago

households save more than 30% with no place to invest while the corporate sector is burdened with debt

So what the Chinese are proposing is not exactly an investment, it is a transfer of debt from companies to individuals. Anyway, doesn't seem like an idea that would work -- investing in failing companies is a recipe for disaster.

prewett• 11 years ago

This sounds like a conspiracy theory to me. The only way you could transfer money from households to corporations via stock would be if the households bought IPO stock. Once a stock is sold through the IPO, it doesn't matter what the price is, the company doesn't get any of that money.

puranjay2• 11 years ago

I have a simple rule for investment opportunities - if you hear about it in mainstream press, it's already too late to invest

dak1• 11 years ago

It's not clear from that quote if the analyst is referencing the market decline or the freezing of funds in over a thousand stocks and/or actions taken by the government to attempt to control the market.

jpmattia3• 11 years ago

I always wondered what evidence there is that a trading freeze would stabilize a market.

Considering the US market has trading halts as well, US regulators should take note: Sometimes a stock goes down because it should.

grandalf• 11 years ago

Behavioral economic studies show that humans prefer to avoid loss more than to gain --

So it's possible that markets rationally cut losses more than they rationally add capital to undervalued stocks.

Regardless, all the "freeze" does is make the published "price" no longer reflect the market price.

coliveira2• 11 years ago

I think it is OK to have trading halts for particular situations. For example, a stock may be going down quickly just because of a wild rumor. Halting trade for the day may give time to investors, so they can consider what the facts are before taking a more informed decision. On the other hand, I agree with you that trade freezes are not enough to fix true underlying issues -- as it seems to be the case with China.

jpmattia3• 11 years ago

I think it is OK to have trading halts for particular situations.

Sure, but that's not what I'm referring to: Anytime a stock drop by a given percentage, it is halted. Also, if the market drops by a percentage, the entire market is halted.

If those happen to be part of a larger coupled drop, then the US market would have the same problems opening that the Chinese market is having: Everyone waits for the open, tries sell all at once, re-invokes the halt, and repeat.

hueving• 11 years ago

Even a wild rumor is a stupid reason to halt trading. If someone is dumb enough to believe it and they sell their shares at a massive discount, it's not the job of regulators to stop that.

vessenes• 11 years ago

Trading halts are common historically in many markets in the US as well, like you said. Commodities have a history of halts, and there have been many periods where you'd have three or four days in a row of halted trading in the first minute; essentially these highly leveraged markets needed to move way, way down or up and took a while to do so with the halt system.

I don't know what commodities markets in the US do now with respect to halts, but in a world where we have retail players swimming with very sophisticated traders, I think the halts likely help more than hurt for the small players; retail brokerage users have no hope of dealing with short term spikes and may get stop-lossed out unfavorably; a halt lets them think hard and change up their stops overnight or once they see the news.

bedhead3• 11 years ago

When a certain amount of time is needed to process new information, then halts make sense for relatively brief periods. Otherwise it's silly. Halting Pets.com in 2000 wouldnt have mattered, just like I suspect the halt in the majority of China's stocks wont either.

jpmattia3• 11 years ago

When a certain amount of time is needed to process new information, then halts make sense for relatively brief periods.

Yes. I'm referring to the automatic halts after a percentage drop.

Halting Pets.com in 2000 wouldnt have mattered,

Exactly. The trading-pause rules have been implemented since then. I'm wondering if the trading halt rules would have exacerbated the Y2K meltdown.

MarkMc• 11 years ago

For a taste of what Chinese investors are going through I highly recommend Galbraith's "The Great Crash 1929" [1]. He gives fascinating insights into to the mania and crash of the market and the futility of the authorities to prop it up. Here's an excerpt:

The worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few people as possible escape the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. The bargains then suffered a ruinous fall. Even the man who waited for volume of trading to return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next 24 months. The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable.

The rumors in China about malevolent foreign influence on the market also echo the 1929 crash. Galbraith again:

What was perhaps the last word on the policy of reassurance was said by Simeon D. Fess, the Chairman of the Republican National Committee: "Persons high in Republican circles are beginning to believe that there is some concerted effort on foot to utilize the stock market as a method of discrediting the Administration. Every time an Administration official gives out an optimistic statement about business conditions, the market immediately drops."

[1] http://www.amazon.com/Great-Crash-1929-Kenneth-Galbraith/dp/...

kvcc01• 11 years ago

It seems the indices are down 30% or so from their prior highs, which is unpleasant but nothing like the 1929-32 period. Even Nasdaq had cratered far worse in the early 2000s. By comparison, Dow Jones went from 381 to 41 in just about 3 years from its 1929 high, which is an astonishing 90% loss. Actually I didn't know it was that bad until I looked it up.

backtoyoujim• 11 years ago

From the wikipedia page about the 1929 crash ... this part was very telling:

"The market would not return to the peak closing of September 3, 1929 until November 23, 1954."

adventured3• 11 years ago

As of the open today, ChiNext was down 41% in a month.

As of right now, 90% of China's entire stock market is frozen. It's absolutely a 1929 style disaster. Were the authorities not stepping in constantly, the carnage would be far worse already - which is another way of saying, eventually it will get there no matter what they do.

http://www.bloomberg.com/quote/SZ399006:IND

azernik• 11 years ago

30% in less than a month, compared to 90% over 3 years.

If you're comparing apples to apples (first few weeks of the American crash of 1929 to the current Chinese crash) the numbers look very similar.

vijayboyapati• 11 years ago

I've read it. Galbraith's history is ok and his writing is entertaining but his economic analysis is terribly flawed. I recommend Rothbard's America's Great Depression for a solid economic analysis of the causalities involved in taking a market crash and turning it into a depression. The book is available in pdf free online: https://mises.org/library/americas-great-depression

rjtavares2• 11 years ago

Honest question: reading the "Political activism" section of the author's wikipedia article[1] gives me no hope of an unbiased analysis of the situation. In the book, does he try to give a balanced view, or is it a reflection of his own views as an anti-statist Austrian School economist?

[1] https://en.wikipedia.org/wiki/Murray_Rothbard#Political_acti...

tiatia5• 11 years ago

"... but his economic analysis is terribly flawed."

I doubt that an analysis from the Mises institute is going to enlighten us here. Austrian economics is interesting but fails on long term analysis and deeper insights due to Mises flawed understanding of Money.

A former Austrian...

joe_the_user2• 11 years ago

The Great Crash comparisons are tiresome not simply because of the difference scale so far but because history is full of crashes, some with 1929 outcomes, some with other outcomes - well, naturally all fairly bad in the short run but still with important differences. Japan's meltdown in '89, the little Dragon's crash, the 2006-8 crash, etc, etc.

fpp• 11 years ago

Have a look at the chart - http://finance.yahoo.com/echarts?s=000001.SS+Interactive#{"r... -

From Oct 2008 to Oct 2009 the SSE dropped from almost 6,000 to 1,700 (after it rose from 1,800 to 6k the year before).

Artificial bubble created by many different factors one being the limitations for Chinese investors / money to go abroad.

So we've seen much worse or the same in 2007 / 2009.

Magicstatic3• 11 years ago

Serious question: How difficult is it to short the entire Shanghai Composite Index? Would it even be possible to place a trade?

bedhead3• 11 years ago

ASHR is the etf with the most liquidity.

Magicstatic3• 11 years ago

Thank you for bringing this to my attention... second question: Why isn't everyone and their sister shorting the Asian market right now? Or are they?

PublicEnemy1112• 11 years ago

I would buy put options instead of a naked short. I know it looks like an easy trade right now, but the Chinese govt. can be unpredictable. Even if you're right over a 6 month period, you can still blow up in the short term

Magicstatic3• 11 years ago

Understood. Thank you

TorKlingberg• 11 years ago

Yes, be careful. Just two months ago HN:ers were asking how to get in on Chinese stocks as they were going up 10% every day: https://news.ycombinator.com/item?id=9471858

Mikeb8510• 11 years ago

Good luck. The premium to borrow shares is very high right now.

And with the Chinese government saying they're going to support the market, I wouldn't want to be short.

xux• 11 years ago

You can buy $YANG ETF. FTSE China Bear 3X Shares

rrggrr3• 11 years ago

This is a deflationary spiral playing out in a predictable manner. First commodities declined, hard. Balance sheets and earnings fell. Real estate falling. Equities now rocked, the effect amplified by fear and increasing uncertainty. There is about 2 trillion of US dollar reserves on China's balance sheet, and I am guessing that number will decline by half in the months, possibly years to come.

shostack• 11 years ago

What would you expect to occur in terms of impact to the US and rest of the world?

rrggrr3• 11 years ago

China probably will liquidate treasury holdings to fund their margin bank and other stimulus, and they will do it at a loss because global uncertainty is forcing yields down. Put simply, a lot of USD sequestered on China's balance sheet will find its way back into global commerce. Thankfully.

duncan_bayne• 11 years ago

http://www.quickmeme.com/img/3b/3bcf43f1e32c11142f206cc2501f...

JimmyM• 11 years ago

Given that Chinese investors have been buying significant amounts of real estate abroad (http://uk.reuters.com/article/2014/07/30/uk-china-property-o...), does anyone have any idea what this will mean for housing in other countries?

Higher house prices? (Chinese bears fleeing to overseas property like American bears flee to gold)

Lower house prices? (Chinese investors attempting to recoup their losses/keep enough cash on hand to pay their debts and other obligations)

Neither/something else? (perhaps Chinese real estate investment has a negligible effect on house prices)

This is a significant question for me because house prices in the UK are far too high for my partner and I to have much chance of ever buying a property, at present, even with a very healthy deposit.

wora• 11 years ago

The buying power of Chinese consumers already pushed up price for many things, from commodity to luxury goods to real estates. It is unavoidable nature of society growth. This has very little to do with Chinese investors. Very few people got rich through stock market in China (probably the same everywhere).

evgen• 11 years ago

Chinese buyers have a much bigger impact on the western coasts of the US and Canada (Vancouver specifically) than they do in the UK. Foreign buyers in the UK are mostly European or from the Middle East and conditions in both places are probably making people favor parking capital in the UK.

If you are Chinese and able to get your money out of the country and into foreign property you would probably hold on to that property for as long as you possibly can; by being outside of China it is worth far more than anything you might use to cover domestic debt.

Tiktaalik• 11 years ago

We'll get to find out if these houses have been bought using laundered cash or if the owners are using financing dependent on foreign income.

If these houses are largely investment properties purchased to hedge against the home market, then it's more likely the former.

I expect we will see higher housing prices as the rich try harder to move more of their money out of China.

tiatia5• 11 years ago

The NY Times has a detailed explanation of how the market got into trouble, and why it's not likely to fix itself overnight: "Put all these pieces together, and here's what we have: a rise in Chinese share prices in the last year that seemed to be driven more by investor psychology than by anything fundamental."

Ouch. Stock prices follow fundamentals, if at all, only in the longest terms.

China Trade Halts Locks Up $2.2 Trillion of Shares, Freezing Market

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