Deutsche Bank on China's crazy stock market – Business Insider

Deutsche Bank on China's crazy stock market – Business Insider

REUTERS/StringerA trainer picks up Chinese Yuan banknotes from the open mouth of a crocodile during a performance at a zoo in Wenling, Zhejiang province March 2, 2015.

China’s markets are going crazy again and Deutsche Bank’s Jim Reid is taking the big step of admitting he doesn’t get it.

Stock markets in China went into free fall in June, pausing only briefly after massive government intervention.

Then on Monday the slump resumed, as the Shanghai Composite tanked 8.5%. That was the biggest single-day fall since 2007.

Markets are only slightly lower Tuesday, but after a hugely volatile session. The Shanghai Composite opened down 5% and eventually ended down just 1.68%. That’s a massive swing.

In a note sent to clients on Tuesday morning Reid, Deutsche Bank’s head of global fundamental credit strategy, reflects on just what the hell is going on over there. And his conclusion is, well, we just don’t know.

Here’s Reid on Monday’s slump:

There was no obvious explanation for the timing or magnitude of the slump. It ceased to be a free market a long time ago so analysing it is tough. Does the slump really reflect concerns over weaker economic growth when the dramatic bubble ascent occurred at a time of sharply weaker growth in the first half? It all seems pretty random to me.

The conventional wisdom behind the slump is that it has been caused by huge numbers of retail investors being forced to sell shares to pay back borrowed money. But Reid is right that there’s no obvious cause to Monday’s slump.

Reid isn’t the only one to make the point about China’s stock markets ceasing to be a free-market. Patrick Chovanec, chief strategist at Silvercrest Asset Management, recently tweeted that China has “destroyed its stock market in order to save it.”

Both are saying that the level of government intervention to stop the slump has been so great that stock markets are no longer functioning freely.

Beijing has tried everything from pumping billions into stock markets to banning selling to try and stop prices tanking. It’s latest effort is simply to assure investors it will “continue to buy stocks to stabilize the market.”

China is desperate to stop the stock market rout because so many ordinary Chinese are caught up in the market. There are an estimated 90 million retail investors in China — ordinary people who have put their savings into stocks. If even half of those lose money the government will have a lot of angry citizens to deal with.

But there are some winners in all of this stock market insanity — stock brokers. The huge surge of money flowing into stock markets means China’s listed securities companies netted 80.8 billion yuan ($13 billion) in first-half profits — a 337% surge from the same period a year earlier.

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Deutsche Bank on China's crazy stock market – Business Insider

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