Landslide in China: why not fell world markets

Stock indices in China on Thursday fell more than 6%. The Shanghai stock exchange index Shanghai Composite following the results of session fell to 6,41%, falling to 2741,2 points. YTD, the index lost 23%. The SZSE Component index of Shenzhen stock exchange, showed an even more serious decline, losing 7,41% to 1738,6 points. The index takes into account the value of the shares of the most liquid and large companies, including with state participation.

“The market is in quite unstable state, when they all move to the exit”,- quotes Bloomberg words strategist at Central China Securities Zhang Ghana.

What investors reacted?

Managing partner of Caderus Capital Fund investing in shares of Chinese companies, Andrei Akopyan, said that investors are selling paper as negatively assessed the decision of the people’s Bank of China to raise the rate on overnight loans. The ensuing increase in interest rates in the money market led to the sale of shares, as has caused growth of fears concerning deterioration of a situation with liquidity in the financial sector. “Investors considered the steps by the Central Bank negatively. The situation was exacerbated by the presence of a significant number of private investors in the market, which generally follow the behavior of large players, this has reinforced the market decline,” says Hakobyan.

Sberbank CIB analyst Vladimir Pantyushin draws attention to another factor: the negative reaction of the market could cause the statement of the head of the analytical centre under the Chinese government that the authorities should reduce lending to unprofitable state-owned enterprises and to reduce the overall level of debt in the economy. “This, as well as the increase in rates may lead to the slowdown of the Chinese economy, so investors are painfully reacted to such statements,” – said Pantyushin.

What exactly did the people’s Bank of China?

On the eve of the people’s Bank of China raised the rate on overnight loans (the so-called overnight) by 0.16 percentage points to 2.12% and at the same time provided the market 340 billion yuan ($52 billion) via reverse repos. According to a post on the website of the regulator, the NSC has conducted operations for a period of seven days and a yield of 2.25%. “The regulator is afraid that the yuan will simply flow into dollars, therefore, provides liquidity and simultaneously raises,” says Hakobyan.

Earlier Tuesday, the people’s Bank of China has already injected into the approves another 130 billion yuan ($20.1 billion) through reverse repo. In late January, the people’s Bank of China with similar operations poured into the market in the total amount of about 690 billion yuan ($105 billion)

What was with the Chinese market before?

On 20 February the Central Committee decided to dismiss the head of the securities regulator Xiao Ghana due to the instability in the stock market. “The market reaction to the replacement of the head regulator has been positive and in recent days, the Chinese market grew. On February 22, Shanghai Composite rose 2.3%”,-said Andrei Akopian.

In February, the index fluctuated in the region of 2700-2800 points.

What is the difference from falling in January?

The last time a significant drop in the Chinese stock market experienced in early January, the first business day of 2016, 4 January, the main index of the Shanghai exchange CSI300 fell 7%, after which the bidding by decision of the Commission on the securities market (CSRC) were stopped.

Hakobyan said that in contrast to the situation in January, when the fall of the Chinese market was strong and caught everyone by surprise, the reaction of investors to other markets is more restrained. Most of the markets have not reacted to the collapse in the Shanghai and Hong Kong stock exchanges. The EURO STOXX 50 index gained just 1.94%, the EURONEXT 100 index increased by 1.88%, British FTSE 100 has grown on 2,31,%, the Japanese Nikkei showed an increase of 1.41% to 16140,34 points.

Why global indices fell after China?

According to Pantushin, the market reaction could be stronger, however, investors realize that in the medium term, the decision to reduce lending to the Chinese economy can have a positive effect. “The debt of the Chinese economy is growing and now it is 260% of GDP. For example the crisis of 2008, everyone remembers that the most serious problems were the countries with big debt burdens,” he recalls.

According to Yaroslav Lissovolik, the Chinese economy remains on the radar of investors. “But this risk has already been partially implemented in the fall of the stock price at the beginning of the year and so now indexes almost do not react,” he explains. According to Lisovolik, more important for investors is the expectation of further rate hike by the fed. “It can happen, but if in the U.S. will experience an economic slowdown, this decision may be postponed to the second half of 2016”,- said the expert.

What will happen next?

“American players seem to have tuned in to the resumption of growth. For this reason, all the more shocking looks, a 5% meltdown in the Chinese stock market this morning,” writes in his review of VTB24 Stanislav Kleschev. He believes that China will once again become a destabilizing factor for the global markets, some have forgotten about him in the last 2 weeks.

“The publication of the February PMI (business activity index) next week could spark a new wave of concerns about the current state of the Chinese economy and the passivity of the authorities on giving additional incentives. The resumption of aggressive selling in the stock market is not a good harbinger of this,” concludes the analyst.