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Chinese Stocks Extend Plunge Despite Stable Yuan, As Margin Debt Drops First Time In 8 Days

Following yesterday's massive CNY120bn liquidity injection - the largest since Jan 2014 - and the notable absence of the plunge protection team in the afternoon rout ("we're only here for emergencies"), we note that margin debt fell for the first time in 8 days as Chinese farmers and grandmas realized once again that the stock market is not a free-ride to nirvana. Chinese stock futures indicate the losses will be extended at the open (SHCOMP -2.7%) as the Yuan fix is held unchanged.

Weakness in stocks continues...

  • *CHINA'S CSI 300 STOCK-INDEX FUTURES FALL 0.6% TO 3,603
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 2.7% TO 3,646.80

 

We suspect The Chinese Plunge Protection Team will be out today as we near the 200DMA once again...

 

 

And The PBOC sets the CNY Fix unchanged:

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3963 AGAINST U.S. DOLLAR

For now, no further liquidity injections following yesterday's outpouring...

In a routine operation Tuesday, the People’s Bank offered 120 billion yuan ($18.77 billion) worth of seven-day reverse repurchase agreements, or reverse repos, short-term loans to commercial lenders in the money market.

 

The cash injection marks the biggest of its kind since Jan. 28, 2014, when the bank offered 150 billion yuan via 14-day reverse repos.

Some good news - or sanity...

  • *SHANGHAI MARGIN DEBT FALLS FOR FIRST TIME IN EIGHT DAYS

Outstanding balance of Shanghai margin lending fell by 1.6%, or 14.6b yuan, from previous day to 879.9b yuan on Tuesday, according to exchange data. Tuesday’s percentage drop was biggest since Aug. 3.

*  *  *

Finally, we offer, once again, Alhambra Investment Partners' Jeffrey Snider's perspective on the "dollar run" that China is undergoing...

To start this week, Ma Jun, chief economist for the PBOC, gave an email interview where he expressed his belief that the yuan will be more volatile but in either direction. Many still took those comments as if it were a veiled prescription toward devaluation.

In the near term, it is more likely there will be “two way volatility,” or appreciation and depreciation of the yuan, Ma said in a question-and-answer statement sent by email.

 

The central bank would move only in “exceptional circumstances” to iron out “excessive volatility” in the exchange rate, Ma said.

If the central bank will only intervene under “exceptional circumstances” then the mainstream immediately turned that into “the PBOC is allowing devaluation because that is what it wants.” How any such thoughts could be considered consistent with what the PBOC has been doing until last week can only be misunderstanding the wholesale nature of global finance. Before last week, the PBOC had been intervening (who else could it have been?) so that the yuan wouldn’t move at all.

This week has so far conformed to the wholesale interpretation. Just two days after Ma’s “exceptional circumstances” reference, the PBOC was “forced” to act once more, this time in one of its largest internal injections to, one more time, keep the yuan from depreciating sharply. Pay close attention to net results despite the conventional language:

China’s central bank poured the largest amount of cash into the financial system on a single day in almost 19 months, signaling Beijing’s growing concerns about capital flowing out of the country following the recent weakening of its currency.

 

Short-term interest rates and bond yields in the world’s second-largest economy have spiked in the past week, following an abrupt decision by the Chinese authorities to devalue the yuan last week. As money leaves the country, the amount of cash in the financial system declines, pushing rates higher.

How is that not a “dollar” run, especially since it predates the assumed “devaluation”? The fact that the PBOC continues to flush “dollars” only suggests that it is not over; not even close (the amount of reverse repos PBOC undertakes in yuan is related and proportional to any “dollar” activity). Thus, I think that is why Ma reinforced the idea that China’s economy is in recovery and that the worst had passed at least economically. As I mentioned last week, after holding the yuan steady for five months the PBOC is just hanging on for dear life, hoping that the recovery message takes root and ends the run because it is obviously unable to do so in any fashion of either direction.

While some indications show that perhaps the most acute part of the turmoil has passed, dating to around last Wednesday, that isn’t nearly the same as its welcome end.