Chi­nese stocks have a long way to go be­fore bot­tom­ing

Financial Mirror (Cyprus) - - FRONT PAGE -

China’s Shang­hai SSE Com­pos­ite In­dex has taken yet an­other se­vere hit that pulled it down an­other 6.5%. Chi­nese au­thor­i­ties quickly aban­doned the cir­cuit break­ers that had been set up to pre­vent th­ese types of plunges af­ter they were tripped twice al­ready this month. Th­ese de­clines look steep, but there could still be plenty of free fall be­fore hit­ting a solid bot­tom. Here’s why.

Con­trary to Don­ald Trump’s pop­u­lar re­frain that China is de­pre­ci­at­ing its cur­rency to hurt Amer­i­can ex­ports, the Peo­ple’s Bank of China (PBOC) is try­ing des­per­ately to keep the yuan propped up. We al­ready have seen how the PBOC has burned through an un­prece­dented amount of for­eign ex­change re­serves to keep its yuan/dol­lar peg in­tact — over $660 bil­lion worth by last avail­able count, which by the end of the month could ad­vance to close to $1 tril­lion.

In ad­di­tion to that, the PBOC just re­jected the op­tion of low­er­ing re­serve re­quire­ments for Chi­nese banks, ac­cord­ing to a leaked memo. Even be­fore the leak, just last week, re­ports sur­faced that China’s cen­tral bank would ac­tu­ally go in the op­po­site di­rec­tion and raise re­serve re­quire­ments for some banks ef­fec­tive Jan­uary 25, a very telling pol­icy for a coun­try with a stock mar­ket in free fall. If burn­ing through close to $700 bil­lion in for­eign re­serves is not enough, th­ese two moves re­ally tell you how much pres­sure the yuan is un­der.

Per­haps too much to bear, be­cause as the Fi­nan­cial Times is re­port­ing, China’s state news agency is now bring­ing Ge­orge Soros into the ring, the trader who be­came fa­mous for short­ing the Bri­tish pound in 1992 and break­ing the Bank of Eng­land’s own peg. Soros is also short the yuan, and an edi­to­rial by a Chi­nese state news agency mock­ing him prob­a­bly will only en­cour­age Soros in his con­vic­tions.

In short, all signs point to the PBOC putting its cur­rency first and stock mar­ket se­cond. They are feel­ing the pres­sure on the yuan from all an­gles, and lucky for them they have $3.33 tril­lion left in for­eign re­serves to serve as am­mu­ni­tion to pro­tect the peg. How long that ammo will last is the ques­tion.

So how low can Chi­nese stocks go con­sid­er­ing the PBOC is let­ting them fall for now? The next ma­jor sup­port level is at around 2,300, an­other 17% down. Af­ter that it’s 2,000, and then 1,011.5, a low hit in July 2005. Th­ese num­bers may seem ex­treme now, but con­sid­er­ing the fact that China has ex­panded its money sup­ply by 2,384% in 20 years and that this is fi­nally com­ing to an end now, a ul­ti­mate 65% drop is quite plau­si­ble.

Con­sid­er­ing the sheer amount of mon­e­tary ex­pan­sion, it’s amaz­ing they’ve been able to keep the yuan pegged to the dol­lar for so long. The longer that peg is tested and the PBOC bent on de­fend­ing it, the far­ther Chi­nese stocks will fall in the long run. (Source: 24/7 Wall St.com)

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