Picture this, more than half of Shanghai-listed and Shenzhen stocks are suspended. They are suspended because the companies asked for their stocks to be suspended. Usually this is a mechanism used to stop trading before significant news, but here it's being used so that those stocks don't trade (and fall) during the maelstrom.
This, in itself, is already an odd situation. However, it also makes for something even more strange. Those stocks which are suspended are on average smaller and more speculative. They're more of the true heart of the Shanghai/Shenzhen bubble. Also, Chinese traders are filled with margin debt.
So what happens in this situation? As those traders are faced with margin calls, they need to sell. But they can't sell their worst stocks, because most of those are suspended. So they turn around and sell whatever they can sell. That means selling the higher-quality, larger stocks which are still trading.
This has several implications:
- The Shanghai index drop, at 5.90% on the day, understates the true drop because half of the stocks were suspended and many of the rest hit the 10% daily limit down.
- The higher quality, higher market cap are hit much more than warranted. This in turn leads to indexes such as the Hang Seng China Enterprises Index to be unduly punished - to the point where that index has wiped out the entire bubble run since the bubble started, back in October/November 2014.
- Hong Kong drops as fast as or faster than Shanghai even though it never got nearly as bubblish. This happens for two reasons: first because it's more exposed to all those higher-market cap companies, and second because it also has listings for some of the companies which are suspended in China. Hong Kong, too, ended up wiping out the entire bull run, so we can no longer talk about a bubble there.
Finally, the higher market cap companies never participated much in the bubble. For the most part they never got unduly expensive, so now with their quick implosion there are many of these companies which are downright cheap.
Conclusion
Due to the strange dynamics which took place, the stocks being hit as much or more than Shanghai are stocks that in many cases are high quality and high market cap and were never bubbles to begin with.
This means that the present selloff presents a chance to build long-term positions in these high quality stocks, including the largest Chinese market caps through the iShares Trust - iShares China Large-Cap ETF (FXI) or individual stocks like China Mobile Limited (CHL) and CNOOC (CEO).
There are probably tens of other similar stocks being unduly punished. This is the time to pick them like you would if the US market crashed.
