China's Selloff Is a Buying Opportunity

Chairman of the China Banking Regulatory Commission [CBRC] Mr. Liu Mingkang recently commented on the stock market craze with a “beer bubble” analogy, saying beer would not be as tasty without bubble. The market received his message as an indication that the government would not impose drastic measures to cool down the market.

Then, to most people’s surprise, the Ministry of Finance made an announcement very late last night that the stamp duty would be trebled. So is CBRC Chairman Liu’s message inconsistent with that action from Ministry of Finance?

To interpret that let’s first look at the related entities under the Chinese government structure:

MoF, CSRC, CBRC and PBoC are entities all directly reporting to the State Council -- that is to say, heads of those entities are at the same rank within the government structure and each entity is supposed to have its own authority to impose new policy within its scope of responsibility. That explains the action of the MoF last night.

Having said that, as action from each entity would also have significant impacts to China’s economic wellbeing, I would tend to believe they would work very closely and communicate with each other before any new policy or significant change in policy is announced to public. So I suspect Chairman Liu was well aware of MoF’s action beforehand. Though he might not have known the exact announcement date, he didn’t see that as drastic measure at all and that’s why he talked about his ‘beer bubble’ theory just one week before MoF’s action.

Let’s also look at the timing of last night's MoF announcement. It was announced at almost midnight on a Tuesday while most announcements of this type are made on Friday after market or right before or during a long holiday so that the public can have time to digest such announcements to avoid irrational impulsive market behaviour. On the contrary, this time MoF deliberately made the announcement at such an unconventional timing in order to encourage impulsive market reaction. That was very effective and caused the market to drop by 6% in both Shanghai and Shenzhen. I would say such market behaviour was irrational because what impact in absolute sense is the 0.2% tax increase when the market has been going up at a rate several orders of magnitude faster than that?

MoF’s objective is to cause a sudden abrupt change in market direction in order to give a more remarkable signal to the market participants that the government can and will do something if necessary. However, as the real impact is minimal, I foresee the market will totally recover in no more than a few days.

The ‘beer bubble’ analogy from Chairman Liu and MoF’s deliberate choice of timing together made me believe the government really would not want to cause the market to correct drastically while occasional correction of 10% or so would be expected.

I take this as a good buy opportunity and I've bought some CAF while writing this article. The discount gap of ~20% between CAF vs. A-50 tracker (2823.HK) is too attractive to miss.

Disclosure: I have a long position in CAF

Comments

[Siwei Zhong]

IMPORTANT CORRECTION:

The 'beer bubble' theory was made by Mr. Xiang Huaicheng, former Minister of Finance and current
Chairman of the National Council for Social Security Fund, which is another entity directly under the State Council.

Mr. Liu Mingkang made another comment in March saying CBRC "is not taking any special measures targeting the stock market"

[Siwei Zhong]

In the organizational chart, PBoC shall be linked directly to State Council, a mistake I made in drawing the chart.

[omooc]

Good presentation. While making an announcement at midnight is indeed unusual, it is still 9 hours before the market opens (as I understand it, SSE opens at 9), plenty of time to reflect and plan a course of action. Indeed, this allows the newspaper to present the announcement, together with expert commentary as needed, before the market opens. omooc

[Nidhi]

India ETF investment analysis at:

<b> nidhishodhane.blogspot.../ </b>

[huangthomas]

A good look at Chinese stock market through Chinese glasses. On Thursday, day after 6.5% drop in market indices, the Shanghai index went up 1.2% to 4,109.65; Shenchen index went up 2.51% to 12,944; and Hong Kong Hang Seng Chinese Enterprise (H-share) index went up 3.23% to 10,739. It appears that the Chinese government will light tap the brake to slow down the pace of market craze, but will not knock it down unconscious. Siwei, is your name the same as Siwei Cheng in Chinese? Maybe some one should tell the story of a Chinese drama why he was chosen to fire the first shot!