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Chinese Stocks Swoon as Government Pursues Malefactors, Industrial Profits Fall

Posted by Joseph Trevisani on Nov 27, 2015 2:00:00 PM

China’s major stock indexes plunged on Friday as government regulators investigated some of the nation's largest brokerages,  industrial profits fell and two more heavy industry companies said they expect to miss bond payments.

The Shanghai Composite Index fell 5.48 percent, the biggest one day drop since reaching the bottom of its $5 trillion collapse in August.  A measure of equity volatility soared from its lowest level since March.  

The shares of two of China's largest brokerages, Citic Securities Co. and Guosen Securities Co. plunged by the daily limit after admitting they were under investigation for unspecified security rule violations. Haitong Securities Co. another large broker, whose shares were removed from trading, also said they were being questioned.  

The Shanghai composite closed at 3,436.303, its lowest since November 3rd. The smaller Shenzen Exchange lost 6.09 percent to 2,184.113, its weakest since November 11th.

U.S. and European equities were largely unaffected by the fall on the mainland.  The Dow was down 14.90 points at 17,798.49 at 1:15 pm. The FTSE in London and the Dax in Germany were off 0.28 percent and 0.24 percent respectively.

The euro traded as low as 1.0567 in Europe on mild risk aversion before recovering in New York to 1.0599 in the early afternoon.  It was the second lowest for the united currency against the dollar (by 2 points) since April 14th.

Chinese regulators have targeted indiviuals and companies for what they call 'malicious behavior', in the equity markets. Guotai Junan International Holdings’ CEO Yim Fung who disappeared on November 18 was, the government admitted, "taken away" in connection with a new bribery probe into China Securities Regulatory Commission (CSRC) vice chairman Yao Gang, who earlier in December became at the second official from the CSRC to come under police scrutiny since September. 

According to Bloomberg, "the finance crackdown has intensified in recent weeks and ensnared a prominent hedge-fund manager and a CSRC vice chairman," Bloomberg wrote, concluding that " Citic Securities President Cheng Boming is among seven of the company's executives named by the Xinhua News Agency as being under investigation."

In another sign of the severe stresses in the Chinese economy,  profits of industrial companies slid 4.6 percent y/y last month, reported the National Bureau of Statistics (NBS), compared with a 0.1 percent drop in September. It was the fifth monthly drop in a row and an indication of the difficulties as the government attempts to move the economy from  an industrial-export model  to a more modern  domestic consumption and service makeup. 

Falling sales, including exports,  rising overhead and drains on profits in the oil, steel and coal industries all contributed to October's disappointing industrial profits, the NBS noted. Slower stockpiling of unsold products is helping companies' bottom lines, the NBS also commented. 

Since the financial crash the Chinese goernment has maintained economic growth by buliding industrial plants in many of the heavy industries that were already plagued by overcapacity. The production of these plants has contributed to the oversupply of manufactured and industrial goods adding to the deflationary pressures as the worlds economy has slowed. 

The slower stockpiling noticed by the NBS can only mean lower GDP in China until global demand recovers.

Joseph Trevisani

Chief market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

Shanghai Composite


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