China Small Caps Crash To Lowest Since 2015 Amid Deleveraging “Selling Panic”
Despite China reporting solid economic data on Monday, with beat across the board in everything from retail sales, fixed asset investment, industrial production and GDP printing at 6.9% and on track for its first annual increase since 2010…
… despite the biggest net liquidity injection by the PBOC since mid June after the central bank injected a net 130 billion yuan, and despite yet another rebound in the Yuan, overnight China’s Shanghai Composite slumped by 1.4%, the most since December as a result of a plunge in the small-cap ChiNext index, which tumbled by 5.1%, and is now down 16% in 2017 to levels not seen since January 2015 following a fresh round of broad deleveraging amid concerns about tougher regulations and more IPOs following a high-level conference over the weekend attended by President Xi Jinping in which China hinted at the formation of a “super-regulator”.
The good mood from China’s data was soured when hours earlier the Communist Party’s People’s Daily newspaper warned of potential “gray rhinos” ; highly probable, high-impact threats that people should see coming, but often don’t, and followed a critical closed-door conference on regulation that will set the scene for the financial sector’s next five years.
For those who may have missed it, over the weekend, China’s 5th National Financial Work Conference (NFWC), which was attended by president Xi Jinping, set the agenda for critical financial reforms over the coming years. At the general level, the five-yearly NFWC held on July 14~15th assigned three main tasks for financial work in next five years:
- To make finance better serve the real economy;
- To contain financial risks; and
- To deepen financial reforms.
Commeting on the meeting, Citi Economics said “we are more positive on China’s financial sector over the next five years — Though less surprising, we believe the key announcements by the NFWC have well captured the critical concerns for China’s financial system. If the measures are effectively implemented under a more unified top leadership after the 19th Party Congress, financial risks would be under better control, leverage levels would be reduced, and capital-account liberalization and RMB internationalism would be pushed forward under a less risky and manageable strategy.”
“Xi’s decision to ramp up the regulatory powers of the PBOC and to establish a commission to oversee financial stability and development reflects the increasing financial sector vulnerabilities in the Chinese financial system,” said Rajiv Biswas, Asia-Pacific Chief Economist at IHS Markit in Singapore. “The Chinese government wants to prevent a financial crisis in China that could create shock waves in the domestic economy and create a rising risk of social unrest.”