Shanghai Corrects 10%; America Shrugs it Off

The almost always trusty "when the retail investor gets frothy in euphoria, it is time to hit the exits" appears to work even in China. On the 24th of July I penned a piece [Jul 24: Bookkeeping - Selling China Exposure as Chinese Run In] focusing on the massive amount of new brokerage accounts being opened combined with the largest IPO being priced in 18 months.

Individual investors opened 484,799 stock accounts last week, data from the nation’s clearing house showed today, the most since the five days ended Jan. 25, 2008. “The prospect of making quick bucks in the stock market is luring retail investors,”

Last week Chinese investors opened even more accounts in near record levels - the figures are actually staggering; half a million a week for much of the past month.

• Investors opened more than 660,000 accounts to trade stocks last week, data from the nation’s clearing house showed today, the second-highest amount since January 2008.

While I did not expect this to pay off so quickly, Shanghai fell 4.7% overnight and now is down 10% from the August 4th peak. Obviously in light of a 80%+ run up from the lows it is nothing but there are broader implications. (p.s. geez, that looks like a heck of a double top)

First, as I've been saying the past few days this market was the first to turn to lead the world up. Second, as we've been warning loan growth has been stoking asset values - as the Chinese finally admitted to [Jul 28, 2009: FT.com- Chinese Warn Over Asset Bubbles] yesterday we saw a huge plunge in bank loans in July versus June. In fact, I'd call it remarkable - one 30 day period 75% lower than the previous 30 day period.

• Banks extended 355.9 billion yuan ($52 billion) of local- currency loans, down from 1.53 trillion yuan in June, the People’s Bank of China said on its Web site today. M2, the broadest measure of money supply, rose 28.4 percent.
• Credit exploded after the People’s Bank of China scrapped quotas limiting lending in November and told banks to back Wen’s 4 trillion yuan stimulus package.

While loan growth is still high in absolute terms versus 2008, the change in direction in massive and it truly shows how the banks are an arm of the state in China. Money supply (M2) is still growing off the chart.

• The benchmark index fell 4.7 percent to a four-week low as the commerce ministry said China’s $4 trillion yuan ($585 billion) stimulus package can’t completely offset falling export demand.
• The Shanghai Composite sank 152.01 to 3,112.72, its lowest close since July 13. The gauge has gained 71 percent this year as regulators loosened lending restrictions and the government implemented a stimulus package to revive the economy.

Now, as the thesis was the Chinese would lead the world out of recession - which led in part to some of the early reasons for rallying during this 6 month stock market explosion higher, I find it curious that the drop in both the loans and the Chinese equity markets are getting little attention. We can see in the Chinese export numbers how bad demand is in their top 2 markets - Europe and the US. Exports simply are not improving, so you have a situation where China is vacuuming in a lot of commodities, building things, expanding production capability to sell to.... ???

• Domestic demand is unlikely “to provide a full remedy for the sharp contraction in external demand,” the commerce ministry said in a statement today.
  
• Exports fell 23 percent from a year earlier, the government said yesterday, while urban fixed-asset investment rose a less-than-estimated 32.9 percent.

I guess the bull thesis here is that we just can't see the export growth that will be coming as Europe and the U.S. economies turn back to the green... but it's coming. We are just in the eye of the coming storm of demand as global economies turn. I find that hard to believe but this is the thesis of the day - or people are just ignoring any bad news.

And as we stated last Friday, I surmised that the drop in the Baltic Dry Index which now is so tied to Chinese buying could potentially be a signal that loan growth dropped significantly. [Aug 7, 2009: Baltic Dry Index has Worst Week Since October 2008 - Blame China. Precursor to Loan Growth Slowing?] Well, it continues its fall this week. Again, ignored.


Similar to warning signs that were being sounded in 2007 and periods of 2008 the US stock market will go on its way, whistling past any graveyards until only an overwhelming preponderance of evidence of the bearish sort will sway it. Until then... party on Garth.