re: 7/9 World Indices: Pacific markets continuing their trend..appears to be worse

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Nikkei is down 3% AGAIN.

Why? Are they connected to the Chinese economy by default?

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Shanghai-based money manager Alexandre Werno is having to grudgingly accept one of the downsides to running a fund management business on the mainland: stumping up his own cash to help rescue the stock market.

The executive vice general manager of Fortune SG FMC, a joint venture between Baosteel Group and French bank Societe Generale, he and other senior managers had to each invest 500,000 yuan (HK$625,000) into their company funds as part of Beijing's strategy to arrest the steepest fall in equity prices in more than two decades.

"There was an internal debate but as we are in China, we had no choice," Werno said.

That money came on top of the 40 million yuan of Fortune SG capital Werno's company pledged to split between two of its blue chip tracker exchange-traded funds. As part of a recent measure designed by regulators to restore investor confidence, fund houses like Werno's committed to buying index trackers last weekend. Neither Werno nor his firm is supposed to sell these holdings for at least a year.

The only solace Werno takes from the exercise is "strong signals" from regulators that the government will keep the Shanghai Composite index above 3,500 points, only slightly below the level Werno bought in at.

Trying to call the bottom right now is like catching a falling meat cleaver. The country's two main indices tracking Shanghai- and Shenzhen-listed stocks crashed through their 50-day moving average levels late last month and kept on falling. They are now just 4 per cent above the 200-day moving average, seen as a key support level around which traders cut losses and sell.

The 14-day relative strength index, a measurement of a market's strength or weakness, has been flashing oversold for more than a week with little impact.

"I would say we go back to when all the lunacy started in mid 2014, to 2,300. Another 30 or 40 per cent from here," said Michael Every, Rabobank head of financial markets.

"We undo everything that has been done since then as that was all completely artificial."

In particular, the market's margin trading level - stocks bought with borrowed money - estimated at 6 trillion yuan by Bank of America Merrill Lynch, has become a death spiral. The more prices go down, the more pressure on traders to sell or cough up more cash to maintain their positions.

Citibank analysts believe a quarter of margin positions have been closed while analysts at BAML expect the main Shanghai index would need to drop to around 2,500 points before large-scale margin calls are triggered.

Werno said it was already happening as directors of listed companies borrowed heavily against their own stocks to fund mortgages and other investments and now face calls as loan collateral values plummeted.

"[Investors] have never seen this, including back in 2008. Currently there is no liquidity as we have 50 per cent of stocks in China suspended. Everybody wants to sell. Definitely we're worried," said Werno.

The government now needed to go big, said Tim Condon, chief economist at ING. His solution: A 4 trillion yuan package. "Assuming informal margin debt is equal to formal debt, backstopping outstanding margin debt, [it] would be big enough to halt the panic selling," Condon said.

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Was hoping for the slide to continue

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Was hoping for the slide to continue

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