Monday, 24 September 2018

PBOC Watch

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Suspensions dilute official equity support measures.

Market interventions from policymakers tend to be more successful when they are backed by fundamentals and help correct excessive pessimism/optimism. It is hard to make such a case for China’s stock market, which has seen a flurry of activity over the weekend with little in the way of success.

The SSEC index hit another lower-low for the cycle although official buying of mainly large cap stocks in the last half hour of trading helped to limit losses to 1.3% today.

Not helping sentiment is the high rate of trading suspensions with Bloomberg highlighting that 26% of listed firms on mainland exchanges are suspended locking up 21% of market capitalization.

While the suspensions are intended to protect these stocks, they have the opposite effect because:

1) investors fear that any new purchases could see their funds locked should these stocks be added to the list of suspensions,

2) those in need of liquidity will be forced to rely on sales of the unsuspended stocks, and

3) to hedge holdings of locked stocks, it makes sense to sell those stocks not suspected of government buying.

The suspensions are doing more damage to the market and diluting any official attempts to provide support to the equity market. Until investors see a real change in the growth outlook for China, we will probably not see an end to the volatility – let alone a low – in the Chinese equity markets.


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