Friday, January 08, 2016

What Is Wrong With China (Markets)

What caused the calamity:

a) the Chinese stock exchanges have grown terribly big over the past 7-10 years

b) the regulatory side had been lacking in many areas - no strict imposition of margin lending; wishy washy rules on shorting, so much so that some foreign funds have been able to short the China shares pretty easily(thanks also to Citic Securities); the silly rule that allows companies to suspend themselves indefinitely for no reason, etc...

c) the impostion of circuit breakers is good, just like they had in American exchanges, but again when the regulatory side fails to understand the essence of their own markets, the circuit breakers only encourage more selling to queue up .. why is that, the regulatory body did not realise that the largest participants in their markets are private/retail and not institutional or foreign ... what I am trying to get at is the markets there may be BIG but they are NOT DEEP ENOUGH ... depth is measured by number of participants, the kind of participants, the different types of funds ... so that in any situation there are long funds willing to buy when they see deep value ... right now, when a crisis becomes panic, it mushrooms into calamity BECAUSE almost everyone thinks alike ... so circuit breakers are a no no for now until the market is deeper and more mature

d) the stupid imposition of no selling by substantial company owners ... its like the T+4 phenom here ... Jan 8 was the day they could sell, so guess who is selling ahead of them, if you want ti impose some sort of selling restrictions - do it gradually (e.g. can sell only 5% of their total shares every 3 months till further notice)

e) the lack of maturity and coordination by their central bank and the exchange regulatory body ... left hand does not know what the right hand is doing ... either they did not know or they knew and did not foresee the subsequent effects... how can you suddenly drop the currency and intervene to make it weaker in a substantive manner, didn't you realise that as the second biggest in almost everything, what you decide for monetary policies have significant effects ... obviously NO consultation was made to ECB or Fed ... as they would have advised to do it in steps and gradual basis, and certainly not when your stock exchanges are in crisis mode...

So what now, they have remove the circuit breakers ... now the company owners can sell as well ... you are right at the lowest point of the previous scary correction a few months back ... I would change the rules for company owners to limit their selling by staggering them (as mentioned above) ... intervention is likely to be more aggressive  by Beijing and they can marshal almost unthinkable resources... following 2 days of 7% = more than 15% ... another 7% would really put it in ridiculous territory which should see some genuine buying coming in.

The currency realignment does not hit Malaysia that much as the industries and SMEs no longer compete on the same stuff as China. Yes there will be repercussions but a weaker yuan is mild compared to what the USD did to us. Buying power may be reduced from China but the weak ringgit to almost every other has already shifted our clients elsewhere.

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