Jan 23, 2024

The latest price dump in Chinese stocks has markets waiting for a government intervention. 

CHINA50 – Daily Chart

CHINA50 – Daily Chart 

Despite some negative sentiment, there is still a chance that the CH50 can bottom here. The market trades at 10,924; a move above 11,000 can push toward 11,570. 

Derivatives drove the latest stock price dump. Guotai Junan Futures said around 30 billion yuan ($4.2 billion) of snowball derivative products tied to the CSI 1000 Index were close to levels that would trigger losses at maturity. Another 60 billion yuan of the derivatives were 5%-10% away from their targets. Sino Market added that Snowball derivatives were opened from February to April 2023. 

With downside barriers set to 75% or 80% of the spot price, dealers estimate that most are set at 5,180 points on the CSI 1000 index.  

The government has already banned short-selling. However, many analysts expect a significant stimulus effort to push short-sellers out of the market. 

“China is a waiting game and we continue to be waiting,” said Mark Matthews, head of Asia research at Bank Julius Baer & Co. 

The Chinese economy posted a plus 5% GDP growth in recent numbers, which could catalyse further economic gains. 

Bloomberg also reported that policymakers are considering a $139 billion new debt issuance under a unique sovereign bond plan. A bond offering would highlight the government’s view of the current market sell-off as a crisis. 

Only three special sovereign bonds have been issued in China, with the first effort to raise cash for big banks during the Asian financial crisis. In 2007, Beijing issued bonds to capitalise on China Investment Corp., the sovereign wealth fund created to improve returns on the country’s foreign exchange reserves. Then, they issued bonds during the pandemic in 2020. 

Zhu Tian, an economics professor at China Europe International Business School, believes the country is in recession despite the data. 

“We’re in a recession,” Zhu said. “If you talk to 10 people, seven will say we’ve had a bad year.” 

“I don’t think the government can afford that. This cannot go on forever,” he said, saying stimulus measures are needed to break out of what could be a “vicious cycle” of low confidence that will affect young people. 

“The big risk is that the fallout from diminishing old growth sources could become too large to contain and inhibit new growth sources. If that happens, China could become stuck in transition,” said Yuen Yuen Ang at Johns Hopkins University. 

The pessimism in Chinese stocks will end, making the current panic selling a potential buying opportunity for investors.

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