Peter's Perspective
8th January 2016 by Peter Churchouse

Fear Turning to Panic

First there was indifference (2011 to Q4 2014)…

Then there was greed (Q4 2014 to June 2015)…

Then came the fear…(June 2015 to Q4 2015)…

Now fear is turning to panic…

Of course, I’m talking about China’s stock market.

But in all honesty, this kind of volatility in the mainland market is nothing new. It remains a largely retail driven ‘casino’ when compared against most developed or even developing markets.

This morning it took just 29 minutes for trading to be halted.

Two out of four trading days so far this year have been halted. (If you’re looking for a part-time trading job, perhaps you should look at an A-Shares desk…).

You might point to China growth concerns as a cause for this mayhem… yet that’s hardly news.

The ongoing rout in oil, Saudi-Iran tensions, global deflationary concerns, North Korea’s H-bomb detonation don’t help… but the regulators aren’t doing anyone any favours.

Chinese authorities love continually adjusting and tweaking policy. Just look at the property market. Over the past few years there have been hundreds of little adjustments here and there to try and maintain stability and an upward trajectory.

But authorities are finding once again that the raw animal instincts or fear and greed that drive this retail-dominated market cannot be ‘managed’ with constant policy adjustments.

Unfortunately, this approach simply breeds uncertainty, volatility and ultimately panic.

Take the new market circuit-breaker mechanism for example. If the market hits 5% down, then trading is suspended for 15 minutes.

You can imagine what is now happening during those 15 minutes. Instead of calm, panic. A wave of sell orders, before the market reopens only to breach the 7% halt limit and suspend trading for the rest of the day.

Then there’s the ban on major shareholder sales.

Originally set to expire this friday, it has not surprisingly been both extended and modified.

From January 9th, major shareholders cannot sell more than 1% of a company’s shares on the open market in 3 months.

This might provide some crumb of support for the market, but major shareholders are probably asking themselves what the next iteration of these restrictions will look like.

More uncertainty…

What really concerns me however, and what has taken me by surprise is the speed of decline in the renminbi.

Last August I criticized those in the media who suggested that China was entering some kind of currency war.

At the time I said:

“China is a US$10 trillion economy going through the process of trying to integrate into the international monetary system. There will be more bumps like this.”

I maintain that this is not a currency war. I don’t believe that this is being engineered by the Chinese government to build export competitiveness.

I think many market participants (myself included) expected a more gradual ‘guiding’ of the currency. I did not expect Beijing to permit the pace of change that we’ve seen in recent weeks.

However, figures released today show that China’s currency reserves tumbled by another US$108 billion in December.

Readers might recall a piece I wrote in October “A Contrarian View on Chinese Capital Controls“.

“The authorities are in a difficult position. If they act harshly to stem capital outflows that could send a negative signal to the market which could react with even greater demand for foreign currency and selling of Rmb.

If they don’t do anything it seems likely from where we stand right now, that cash will continue to drain out of the country.

The Chinese don’t want to see a big rundown of their foreign exchange reserves. But they equally do not want to see a sharp retreat of the currency.”

This balancing act is now looking harder than ever and is probably my biggest concern after today’s numbers.

Authorities will not allow the currency to go into free-fall yet they are cognizant that forex reserves cannot be run down indefinitely.

We expect more downside BUT we also expect increasingly aggressive measures to stem the decline.

Bear in mind however, this whole process that started in August of last year with the initial depreciation of the currency is the ongoing push to make the currency more determined by the markets.

I also thought it worthwhile including the below chart.

This shows a range of currencies against the U.S. dollar since August 2015 just before the renminbi took its initial large plunge.

Select currencies compared to the USD, showing their change since August 2015 to January 8, 2016

During that time, the renminbi has fared as well as both the British pound and the Australian dollar… and has outperformed Russia, Brazil, South Africa along with developed currencies the Canadian dollar and Norwegian krone.

And the outperformer?

The Yen.

If the Japanese yen is once again becoming a safe haven currency then that’s really something to worry about!

In the meantime, please keep on top of your stop losses.

Good investing,

Peter Churchouse

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