“The market is now a falling knife”, BofAML said on Friday, referring to the harrowing 30% decline in Chinese stocks that has unfolded over the course of just three weeks, leaving the PBoC and various other government agencies scrambling to arrest the slide.
Cuts to both policy rates (benchmark lending rate and RRR) and daily “remain calm” pronouncements by various government agencies have so far proven woefully inadequate to combat the country’s margin mania unwind, leaving BofA to conclude that the only thing which can help Chinese equities now is direct buying on the part of the government.
As a reminder, the problem here appears to be related to the hodge-podge of backdoor margin buying vehicles that have combined to channel between CNY500 billion and CNY1 trillion in unofficial, off-the-books margin lending into stocks via umbrella trusts, structured funds, P2P lending, and a variety of other mechanisms that allow China’s millions of newly-minted retail investors to skirt minimum balance requirements and margin limits at brokerages.
Combatting the unwind may mean, in BofAML’s words, making the government “the buyer of the last resort in the market, similar to what HKMA did in 1998.” This would however, be complicated by the fact that “much of the unauthorized margins were used to buy small cap stocks, so the authority, with or without PBoC’s direct involvement, may have to buy stocks on a very large very broad scale.”
One day later and China has already moved in the direction of direct intervention in the markets, although it appears Beijing will try to orchestrate a “private” sector (whatever that means in China) solution first before going the nuclear route with the central bank’s balance sheet. As Bloomberg reports, the country’s largest brokerages are teaming up to invest nearly $20 billion in “blue