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China’s week of stock market horror has a happy ending

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A Chinese stock investor.Photograph by AFP/Getty Images

Crisis? What crisis?

China’s stock markets finished the week with a flourish, as Shanghai and Shenzhen posted sharp gains for a second straight day.

The Shanghai composite index rose 4.6% while the tech-heavy Shenzhen composite finished up 4.1%. As a result, Shanghai managed to finish the week up 0.1%, while Shenzhen was down a mere 4%. Hong Kong’s Hang Seng index, which was also dragged down by the chaotic scenes in mainland markets earlier in the week, managed to

But the situation remains anything but normal, and the turnaround, such as it is, has only been achieved by a cocktail of coercive measures from Beijing that have banned many key actors from selling, forced others to buy and indirectly thrown the Central Bank’s reserves into supporting stock prices at levels that many still feel are irrational.

Figures out Friday hinted at the scale of the support measures deployed by Beijing: inflows into Chinese equity funds and equity-based exchange-traded funds surged to $13 billion in the week to last Friday (i.e.–that’s before the heavy artillery was deployed this week), equivalent to 9% of all assets under management – a massive outlier that suggests that something unsustainable is going on.

Last week was no ordinary week for China's markets.
Last week was no ordinary week for China’s markets. Source: BAML, EPFR


Strategists at Bank of America Merrill Lynch point out that there’s no precise way of knowing what those inflows represent. But one possibility, they say, is market-support measures rather than private-sector demand. Another is that funds could be creating shares in response to demand from short-sellers, they said.

This chart from Steve Wang, chief strategist at Hong Kong-based brokerage Reorient, suggests that net selling pressure from international and offshore investors, via the recently-opened link between the Hong Kong and Shanghai exchanges, has eased considerably in the last two days.

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Foreign sellers have quickly drawn in their horns since the PBoC entered the market. Source: Reorient


Wang said that “the risk-reward of going against nearly unlimited ammunition supplied by the (People’s Bank of China) to state funds is truly not worth trying. This makes the ongoing bounce very real and durable.”

However, just under 1,400 companies’ stocks–over a third of the market–are still suspended from trading at their own request. The day when the action on China’s stock markets accurately reflects underlying supply and demand, on the basis of generally perceived economic fundamentals, might still be some time in coming.