Chinese Stocks Recover After Hammering—For Now

China's government has announced measures to stem the flow of blood from the stock markets, including a ban on short selling.

Chinese Stocks Recover After Hammering—For Now

Following a their worst week in years, Chinese stocks have bounced strongly from yesterday's fresh lows after Chinese President Xi discussed ways of stabilizing markets with regulators. However, these measures are a sticking plaster, given that there are some serious structural weaknesses, and there is no indication that the root problems have been fixed.

Shanghai Composite (TradingView)
The Shanghai Composite has lost 20% of its value in the last nine months.

Yesterday, the Shanghai Composite Index fell for its sixth consecutive session, dropping 1% to its lowest close in four years. More than 1,800 stocks on the Shanghai and Shenzhen markets fell more than 10%. Last week, the Shanghai Composite fell over 6%, putting in its worst weekly loss since October 2018.

Unusual Measures

Chinese authorities have been trying to stem the bleeding with a variety of measures designed to prop up the markets, though some of these are pure manipulation. According to The Kobeissi Letter, new restrictions include:

1. Limiting investors' ability to short Hong Kong stocks

2. Telling investors they are not allowed to sell their positions

3. Some quant funds being completely banned from placing sell orders

4. Other quant funds being banned from cutting leveraged positions

Moreover, Chinese authorities are even cracking down on negative sentiment, leading some to resort to unusual outlets. CNN reported that Chinese traders had posted comments on the US Embassy’s Weibo page asking for help, because other means of voicing their concerns (such as Chinese regulators' own social media accounts) had been cut off.

Ailing Economy

China facing significant problems, driven in part by its faltering property sector. Last week, a Hong Kong court ordered the liquidation of Evergrande, following its default two years ago.

A number of shadow banks—huge financial organizations that operate outside the regulatory framework of the conventional financial sector—have suffered major losses due to their exposure to the real estate market. There are concerns that there could be contagion from these losses to the wider economy.

China’s Hang Seng Down Over 50% From Peak
The chart for the Hang Seng could reasonably be mistaken for that of bitcoin.

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