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China’s government fights with reality

China’s market is a battlefield of two unequal forces. However, peak of this fight is not achieved yet.


The one force is the government interruption, which reminds of Brownian motion, in order to show that assets still have a space to move. The regulator has toughly limited trading conditions for market players and interrupted current trading, buying aggressively assets and making obstacles for price clarity.


The other force is the objective reality. Its main weapon is the data about problems of China’s economy, outflow of capital, falling yuan, overestimated assets, and excessive borrowings. Investors, who examine China’s market, think that this force will cover everything sooner or later.


China’s regulator has injected an additional liquidity in market in order to restrain stock indices from another fall. The regulator has also said that lifting the ban of securities sale can touch only investors that hold less than 5% of assets of the company. As a result of regulator’s direct interruptions in market in order to purchase assets, which could be seen in summer, a 3% fall of CSI 300 rose and the index fixed at fall by 0.25% three quarters of an hour before the end of a session. At that time the central bank performed interventions on currency market to stimulate national currency.


This situation gives players not time to catch the breath. Despite the fact that all positions achieved a year ago have been already lost, stock market is still overestimated.

According to investigations made by Citigroup, CSI 300 is at level of twentyfold ratio between cost and yield for the next year.  This is, certainly, lower than on 35x extremum, but far from average rate of  13x-19x range. Here the index was before China’s market bubble in mid-2014.


Hong Kong stock index Hang Seng A-H SP, which shows difference between securities of this market and mainland market, signals that price moves with 38% over spot, though it was 8% during previous 5 years.


Besides, China’s market is full of borrowings, which must be repaid. Margin level is fixed at 1.2 trillion yuan. It is twice below the peak, but exceeds a rate fixed during credit boom in 2014.


Perhaps, the regulator should leave the market and let it define the rate by itself. Taking into account that neither yield of companies nor economic growth showed expected improvement, possibility to move further down is on the agenda. However, while China’s government fights with reality, it will be hard to understand government’s actions.