China Stocks Come Totally Unglued Beneath the Surface

The Shanghai Stock Exchange closed down 1.3% on Tuesday, which seemed benign after its three-week, near-30% crash that saw $3.2 trillion go up in smoke. It calmed the nerves in the West; a further collapse has been averted by astute government and central bank action.

But the index was down only 1.3% because government entities, government controlled institutions, mutual funds, 21 of the largest brokerages, pension funds, the largest companies themselves, and whoever else has to follow government wishes had been buying shares of the largest companies, such as state-controlled oil companies and banks. Buying kicked in seriously toward the end of the trading day after the index had been down 4.3% earlier. With their large weight in the index, these gainers propped up the overall index. But beneath the surface, it was brutal.

The Shenzhen Stock Exchange index, where smaller and medium-size companies are traded, plunged 5.3%; the ChiNext index, where tech companies and small caps are concentrated, plummeted 5.7%.

Countless stocks hit their 10% down limit for the day. George Chen, Managing Editor at the South China Morning Post’s International Edition, reported that trading in 942 stocks, one-third of the A-share listed companies on the Shanghai and Shenzhen Stock Exchanges, had been suspended by the end of the day to shield these shares from further collapse.

Now the Chinese media are in a fix. They’d been ordered over the weekend to write only positive comments about equity markets. But on Tuesday, with the selloff continuing in all but the largest listed shares, confusion set in that George Chen at the SCMP captured with this tweet:

“State media sources: as stocks keep falling, now we don’t know how to write next editorial. Xinhua’s defended bull market since slump. Next?”

Here’s what was next: The World Bank has removed from its report on the Chinese

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