How Long Before This Spills Over?

By Heisenberg

I don’t know about you, but I can’t get enough China.

It’s all about China these days. Of course you wouldn’t know it to look at global equities. Have a look at this:

China

“Spot the odd one out.” “Which one of these isn’t like the other?” Etc. Etc.

Basically Chinese equities and bonds are selling off, while risk assets the world over continue to rally, which makes you think. Specifically, it makes you think this: how long until the rest of the word wakes up to the Chinese reality, because the last two times there was “big trouble in little China,” the contagion spread quickly (and viciously). 

Overnight we got the latest TSF figure and it looks like the PBoC has managed to walk the tightrope between reining in shadow banking while keeping credit flowing to the real economy. What you want to look at in the chart below is the difference between the dark purple line and the light purple line. See how it was substantial in March but not so much in April? Yeah, so that’s shadow banking shrinking while credit to the real economy rises…

ChinaTSF

The reason that’s so important is pretty simple and can be summed up in one chart:

ChinaCredit

(BBG)

Of course while Beijing might be able to keep credit flowing to the real economy (new RMB loans) while squeezing leverage from the unruly shadow banking complex, the latter effort doesn’t come without consequences. Consequences like what amounts to a giant margin call on speculation. That’s finding expression in metals mayhem and also across other assets. Assets like stocks.

Consider the following out this morning from Bloomberg:

The ChiNext small-cap gauge, seen as a barometer for Chinese stock-market sentiment, has taken quite the hit this year, down 9.7 percent and close to its lowest level since February 2015. The selloff erased all that was left of a rebound from a low later that year, after a bubble in China’s markets burst.

BBGChina1

A technical indicator suggests the Shanghai Composite Index has fallen too far, too fast. The gauge’s relative strength index dipped further below the 30 level that signals to some traders an asset is oversold, and is close to levels not seen since 2013. Chart watchers are still waiting for that rebound.

BBGChina2

The benchmark for yuan-denominated shares has lost 6.9 percent in the past month, while global stocks are up 2.8 percent. That divergence means the Shanghai measure is trailing the rest of the world by the most since 2014.

BBGChina3

Chinese stocks now make up less than 9 percent of the world’s equity market, the smallest slice since June last year. The value of global equities is near a record $73 trillion reached earlier this month.

BBGChina4

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