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Citi Warns Chinese Stocks "Look Precarious", Fears 23% Downside Correction

The Chinese stock market is "looking prercarious" according to Citi FX Technicals' team. A bearish outside day on the Shanghai Composite could represent just the first of a series of technical patterns that suggest a potential 23% correction... as 100s of thousands of newly minted margin'd retail equity 'investors' find out the hard what a tap on the shoulder feels like. As Paul Sinder warned, "take a look at a chart of Chinese retail margin debt, but not just right before bedtime. It looks something like the U.S. figures heading for 1929."

Via Citi FX,

 

  • The Shanghai Composite Index posted a bearish outside day in today’s trading (see insert above)
  • This suggests a return to the recent low from January 14th at 3,095. A breach of that level would confirm a double top that would target a decline to 2,785
  • Such a move would break through the 55dMA for the first time since July 2014 (on a closing basis).
  • Given the stretched moving average dynamic a breach of the 55dMA would leave the way open for a move to the 2,415 – 2,445 range, where the 200dMA converges with support from the February 2013 high

Everything's fine...

 

Perhaps - more fundamentally speaking - Elliott's Paul Singer sums it up best...

A universal belief underlying global financial markets is that the Chinese government has complete control over its economy and financial system. We cannot know whether the corruption, bad loans, see-through projects, and internal dynamics of the Chinese system are bad, very bad, or headed for a crack-up, but any set of developments that challenge the widespread assumption of complete Chinese control over its destiny would be a very large shock to global markets.

 

We suggest you take a look at a chart of Chinese retail margin debt, but not just right before bedtime. It looks something like the U.S. figures heading for 1929. But there is no way for outsiders to know the net of the balance of forces, and whether the negatives are overwhelmed by the Chinese economic growth juggernaut.

 

To paraphrase Senator Everett Dirksen: A trillion dollars of margin debt, a couple of trillion dollars of sour loans, a trillion dollars of wasted capital projects, and pretty soon you are talking about real money.

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