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Over 700,000 new trading accounts were opened by Chinese brokerage firms last week as more first time investors flock to the Shanghai market. Even after last night’s downturn as the market digested a slew of newly announced IPOs the Shanghai composite is still up 84% YTD.  

The “it’s a bubble” crowd are pointing out, correctly, that short term rates have been spiking as more hot money flows into the equity and futures markets (see the 7 day and 14 day SHIBOR chart below). Despite an 18 basis point pullback last night the one week swap rate is still up 32% from this time last month. Clearly the bearish thesis is based on a common sense perspective that often: unbridled optimism + easy credit + inexperienced investors = an overextended rally.

Shanghai's SHIBOR Experiment...  - barber123

The “it’s not a bubble (just yet)” crowd – which includes the strategists at most big banks,  are arguing that multiples, while expensive, are justified by ramping internal demand dynamics that presents the best long term growth prospects on earth. In other words, on a longer duration the exuberance is justified. Where these cats were 9 months ago on China (100% lower) is beyond us…

The PBOC quarterly monetary report released yesterday stated with usual opaqueness that policy tools would be used to achieve “appropriate” liquidity levels. Although I am not privy to any inside track at the PBOC, if I was going to speculate about exactly what “appropriate” means in this instance –I’d guess that it means that the desire to continue bring new issues to market will be offset by an equally stronger desire to avoid any market volatility that could cause consternation among the masses in advance of the celebration of the anniversary of the People’s Republic on October 1st. As such any tightening of credit will likely be executed in stages designed to provide a soft landing. 

China is a managed economy, not a free market, and order is prized above all else in Chinese society. Therefore it is only natural that the powers that be in Beijing will attempt to manage the equity market towards an orderly outcome in advance of the biggest public event since the Olympics.

How appropriate.

Andrew Barber
Director 


Director