EVERYONE KNEW THIS WOULD HAPPEN
No we are not talking about Greece, although, we will be the first to admit that we did not see brinksmanship leading either to the breakdown of talks last week or the ultimate no vote over the past weekend. Instead, we are talking about the crash in Chinese stocks, which has been defying gravity for so long that most everyone we talk to expected a fairly major correction. Prior to the peaking of prices early last month, the Shanghai Composite was up over 150% in a little over 11 months, while the Shenzhen Index rose 180% during that time. The return to earth has seen a 30% fall in broad prices over the past month, with little signs of a letup in selling pressures. The Chinese government and the country’s largest brokerage houses have attempted to arrest the selling, with a cut in interest rates and a concerted effort to buy billions of dollars’ worth of shares. So far these efforts have not worked, as a large percentage of the listed stocks are now suspended from trading. Approximately 1,400 companies on the 2 exchanges are under a trading halt, many at the behest of company management, leaving slightly over a half of the listed share available for trading. We have seen some discussion that the companies requesting trading halts had posted their shares as collateral and the halt was an attempt to maintain collateral levels. If this proves true, then we would expect a great deal more selling as the leverage continues to unwind. We are not placing particular weight on the impact that Chinese stocks may have domestically, other than to point out that financial crashes have a nasty tendency to affect other asset classes. We think that the weakness we have witnessed in many commodities over the past week may be one of these correlations, as oil and copper prices are 14% and 6% lower over the past 1-1/2 weeks. Given the apparently contained nature of the Greek crisis, we would also put greater weight on China’s effect on the movement of rates and the risk-off environment.