World Financial Markets In Panic

China Crashes: Shanghai Composite Plunges 5.4% Amid Record Trading, Biggest Tumble Since 2009

Those who have been following the ridiculous moves in the Shanghai Composite in recent months, knew it was only a matter of time before yet another major stock market (one which recently surpassed the Nikkei for the second largest spot in the world) crashed violently, further eroding faith in the centrall-planned “price discovery” process. The only question was when.


Following our report last night about China’s change in collateral rules, in which we noted that none other than the PBOC was now eager to pop the equity bubble following the PBOC simultaneously fixing the CNY significantly stronger (implicit tightening) and enforced considerably stricter collateral rules on short-term loans/repos – a move which according to estimates from Shenyin Wanguo Securities, would disqualify some 1.25 trillion yuan in corporate bonds as repo collateral, or 60% of all outstanding corporate bonds listed on China’s two stock exchanges – we were not surprised to see the tumble in the market-traded Yuan (which crashed the most in 6 years), and the surge in interest rate swaps, coupled by the plunge in corporate bonds.


That said, we summarized it as follows:
The PBOC has aggressively taken action to reduce leverage in stock and bond market speculation
The PBOC has tightened monetary policy – raising FX and cutting collateral availability
The PBOC has created a major squeeze in USDCNY – stalling carry trades


We concluded as follows: “We will see what kind of fallout this creates but for now stocks are holding up as FX and bond markets are turmoiling.”


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We didn’t have long to wait, because literally a few short hours after we wrote that sentence, this happened:
CHINA’S SHANGHAI COMPOSITE INDEX DROPS 5% AMID RECORD TRADING


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