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Chinese Trading Suspensions Freeze $1.4 Trillion of Shares Amid Rout

July 7, 2015

 

Chinese companies have found a guaranteed way to prevent investors from selling their shares: suspend trading.

Almost 200 stocks halted trading after the close on Monday, bringing the total number of suspensions to 745, or 26 percent of listed firms on mainland exchanges, according to data compiled by Bloomberg. Most of the halts are by companies listed in Shenzhen, which is dominated by smaller businesses.

The suspensions have locked up $1.4 trillion of shares, or 21 percent of China’s market capitalization, and are becoming increasingly popular as equity prices tumble. If not for the halts, a 28 percent plunge in the Shanghai Composite Index from its June 12 peak would probably be even deeper.

“Their main objective is to prevent share prices from slumping further amid a selling stampede,” said Chen Jiahe, a strategist at Cinda Securities Co.

The rout in Chinese shares has erased at least $3.2 trillion in value, or twice the size of India’s entire stock market. The Shenzhen Composite Index has led declines with a 38 percent plunge since its June 12 peak, as margin traders unwound bullish bets.

In the U.S., there are 121 halted companies comprising less than 0.2 percent of market capitalization. In Hong Kong, 186 firms are suspended, representing 4.7 percent of the city’s equity market cap.

Deter Investors

Searainbow Holding Corp. halted trading on Friday in Shenzhen after losing 54 percent in just three weeks. The company, which makes chemical fibers and online games, had surged 150 percent this year through its high on June 11. Wuhu Shunrong Sanqi Interactive Entertainment Network Technology Co. suspended its shares on Monday after a six-day, 34 percent plunge. The stock is still up 99% this year.

The Shenzhen Composite plunged 5.3 percent at the close Tuesday, while the Shanghai gauge lost 1.3 percent.

The increasing number of halts will deter investors from buying shares on concern any purchases they make will also end in suspensions, said Steve Wang, chief China economist at Reorient Financial Markets Ltd. in Hong Kong.

 

 

Discussion
3 Comments
    LFP
    Jul 08, 2015 08:17 AM

    For those wanting the full coverage on this, from various sources, just copy the following and paste it into your web browser’s Address bar and click Go or, alternatively, press the Enter key on your board.

    https://www.google.ca/search?hl=en-CA&source=hp&biw=&bih=&q=The+suspensions+have+locked+up+%241.4+trillion+of+shares%2C+or+21+percent+of+China%E2%80%99s+market+capitalization%2C+&btnG=Google+Search&gbv=1

    LFP
    Jul 08, 2015 08:59 AM

    ”..The really worrying financial crisis is happening in China, not Greece..”
    Home» Finance» China business» http://www.telegraph.co.uk/finance/china-business/11725236/The-really-worrying-financial-crisis-is-happening-in-China-not-Greece.html

    China looks like it is heading for its version of the 1929 stock market crash
    Already, there are warning signs of a slowdown, similar to those that front-ran the 1929 crash – Photo: Reuters
    By Jeremy Warner
    12:25PM BST 08 Jul 2015

    While all Western eyes remain firmly focused on Greece, a potentially much more significant financial crisis is developing on the other side of world. In some quarters, it’s already being called China’s 1929 – the year of the most infamous stock market crash in history and the start of the economic catastrophe of the Great Depression.

    In any normal summer, a 30pc fall in the Chinese stock market – a loss of value roughly equivalent to the UK’s entire economic output last year – after an ascent which had seen share prices more than double within the space of a year would have been front page news across the globe.

    The dramatic series of government interventions to stem the panic – hitherto unsuccessful, it should be added – would similarly have been up there at the top of the news agenda. Yet the pantomime of the Greek debt talks, together with the tragi-comedy of will they, won’t they leave the euro, has relegated the story to little more than a footnote – even though 940 companies, more than a third, have now suspended trading on China’s two main indices.

    The parallels with 1929 are, on the face of it, uncanny. After more than a decade of frantic growth, extraordinary wealth creation and excess, both economies – America in 1929 and China today – are at roughly similar stages of economic development. Both these booms, moreover, are in part explained by extremely rapid credit growth. Indeed, China’s credit boom dwarfs that of even the “roaring Twenties”. Borrowed money, or margin investing, played a major role in both these outbreaks of speculative excess.

    True, the Chinese stock market bubble is only a one-year wonder, whereas the build-up to the Wall Street Crash of 1929 was more sustained. Even so, the comparison still holds. As noted by JK Galbraith in his classic account, The Great Crash 1929, even as late as 1927 it was possible to argue that American stocks represented fair value.

    It was only in the final year that the “escape into make-believe” happened in earnest, when the stock market rose by nearly 50pc. This applies to the Shanghai Composite, too. Stripping out the lowly-rated banking sector, valuations for just about everything else have rocketed, making those that ruled on Wall Street in the run-up to October 24, 1929, look relatively modest. Nor do the similarities end there. As in 1920s America, China’s stock market boom has ridden in tandem with an equally speculative real estate bubble.

    The macro-economic backdrop is also surprisingly similar. Then, as now in China, rural workers had emigrated to the cities in vast numbers in the hope of finding a more prosperous life in fast-growing industrial sectors. In 1920s America, virtually all these sectors – from steel to automobiles and the new technologies of radio and consumer durables – grew like Topsy, inspiring households to invest in them and chase the apparently bountiful profits they were generating.

    A similar explosion in industrial activity has taken place in China, only more so. China has packed more development into a few short decades than any country in recorded history before, creating a worldwide glut in industrial capacity that even global demand, let alone domestic Chinese demand, is struggling to accommodate.

    Already, there are warning signs of a slowdown, similar to those that front-ran the 1929 crash – depressed commodity prices and a virtual hiatus in global trade growth. The Chinese economy is like one of those cartoon characters who manages to keep running long after leaving the edge of the cliff, only belatedly to look down and plunge into the abyss.

    Naturally, there are many dissimilarities too, not least that China is still essentially a planned and centrally-controlled economy which has so far managed to defy the usual rules of economics. The consensus is that this time will be no different, that even if the stock market does continue to crash, the impact will be no worse than 2007-08, when the Shanghai Composite fell by two-thirds. Yet after a massive fiscal and monetary stimulus, the wider economy barely lost a beat. Have no fear, the Chinese authorities have it all under control. Believe it if you will.

    I don’t buy it. Indeed, I can see very little evidence for China’s technocratic elite having things under control. The firebreaks that China put in place over the weekend to mitigate the panic are, in practice, not much different from those applied during the Great Crash of 1929, only this time it’s public rather than private money that promises to quell the fire. They failed spectacularly in 1929. This time around, they’ve thrown the kitchen sink at the problem, but so far it has produced only a mild, and wholly unconvincing, rebound. The fire still smoulders, threatening to break out anew.

    Besides, China cannot forever, Greenspan-like, keep answering each successive bubble by creating another. First it was gold, then housing, and when cooling measures threatened an all-out bust in the property and construction markets, the taps were turned on afresh, producing a further flood of money into the stock market. The authorities were happy to tolerate the bull market at first, hoping it might encourage a switch from debt to equity financing, but there seems little chance of that now. The stock market boom has only succeeded in adding to the debt.

    Whether any of this turns into a calamitous economic meltdown obviously depends on the rest of the response. Policymakers have learned a thing or two since 1929; we now know that the real damage in financial crises is done not by the crash itself, but by a collapsing banking sector. Stock markets are only a signal of credit contraction to come. Even so, I doubt China has as much of a handle on its banks, and more particularly its shadow banking sector, as it pretends.

    One further thought on these parallels. Now that the export-led model of economic of growth seems to have reached its natural end, at least for China, president Xi Jinping pins his hopes on internal consumer demand to drive growth, and he’s vowed to continue with the free-market reforms of predecessors to help achieve this. Unfortunately, it’s proving a difficult transition. Part of the problem with free markets is that by definition they cannot be controlled. Busts are as much part of their DNA as the wealth-enhancing properties of their booms. As China is about to discover, bad downturns come with the territory.

    Jul 08, 2015 08:19 AM

    Producing a billion widgets that nobody wants is not creating wealth. Replacing the invisible hand (God) with a command economy is ALWAYS disastrous.