The dust hasn’t settled yet from the Swiss National Bank’s shocking announcement and the angst over the latest currency tsunami will continue to be felt all over the world.
At the same time, financial markets are either weathering the storm and moving on or are reeling from the impact and are trying to keep afloat. The latest market to be hit hard is China. Chinese shares dropped to their lowest level in nearly seven years on Monday following steps implemented by regulators to rein in speculative trading.
The Shanghai Composite Index posted its steepest decline since June 2008, plunging 7.7 percent while its 30-day volatility advanced to the highest level in five years and the yuan weakened 0.2 percent against the dollar.
Suspended Brokerages
China’s securities regulator suspended three of the nation’s biggest brokerages, Citic Securities, Guotai Junan Securities Co. and Haitong Securities, from accepting margin-trading accounts for three months. Nine other brokerages received warnings.
“The penalties on margin trading are definitely weighing on China shares today,” Mixo Das, an Asia ex-Japan equity strategist at Nomura Holdings Inc., said. “These are likely part of the process of the government trying to manage the rally there.”
The crackdown on China’s margin lending has not generated a strong reaction in other markets. Many analysts are calling it a temporary monetary accommodation and are predicting that share prices will start to move higher again in China over the next year.
Others are more concerned, however. With the Shanghai Composite dropping as much as 6.4 percent in intraday trade and Hong Kong's Hang Seng China Enterprises Index falling as much as 5.2 percent on Monday, Citigroup downgraded brokerages in the CSI300 index to underweight from overweight.
"China's current level (of margin financing) is already close to or higher than the peak level of other countries and with the much faster pace suggests little upside potential but high downside risks," an analyst at Citigroup said.
Bullish on Chinese Equities
Still, many remain bullish on China’s stocks. According to Mark Matthews, head of research for Asia at Julius Baer, "Part of the reason why the market has gone up is because retail investors have been using margin to invest, but that's only a small part of why it's gone up.”
The China Securities Regulatory Commission (CSRC) which governs bonds traded on the Shenzhen and Shanghai exchanges, has already announced that it will allow companies including non-listed Chinese companies, to sell bonds in an effort to moderate a slowdown in the world’s second largest economy. Until now, only Chinese brokerages and locally and overseas-listed Chinese companies were permitted to raise funds selling exchange-traded securities. The CSRC meets again on Friday to decide on further moves.
Though it isn’t clear how the brokerages will be affected by the CSRC crackdown, the view on the street is positive with expectations that long-term investors will see the current sell down as a buying opportunity and jump back into the market.
In the meantime, with most eyes waiting to see what action will be taken by the ECB meeting on Thursday and with QE speculation keeping the euro moored near last week's 11-year low, China's equity tumble is barely making the headlines.