Monday, January 4, 2016


A newly installed "circuit breaker" designed to stop the Chinese stock market from going into free fall works. We know it works because the circuit breaker stopped all trading in China's stock market after the market dropped 7% this afternoon. Trading on the Shanghai and Shenzhen stock markets were prematurely closed at 1:33 pm.

China's Financial District.
What triggered the free fall is still being debated.

One of the causes could be a product of Beijing imposing a 6 month ban on trading by major shareholders (share holders with a 5% stake or more) back in July (2015). The ban was imposed because China wanted to prevent a bigger panic than was occurring at the time, and is supposed to be lifted this Friday (January 8, 2016). Analysts are worried there will be a panic sell off when the sales ban expires.

For my money, as I pointed out 6 months ago, China's real problem is tied to the fact that many of their market players are over leveraged. Put another way, they've borrowed too much and are now experiencing their "Minsky Moment" - too many market players owe too much to other indebted market players who can't pay.

Reaction to China's market panic in July, 2015.

After today's market developments some China watchers are predicting that over 1 trillion yuan worth of stock will be dumped on Friday.

As should be expected, the stock markets in Japan, Taiwan, and South Korea fell as well.

- Mark

UPDATE: It happened again. Early Thursday morning (1-7-16) China's markets closed again, after being open only 29 minutes. Stay tuned.

No comments: