What had the best Information Ratio in the world over the last year as of last Friday?
Possibly Shanghai Margin Debt Balances... +464% in 1 year on volatility of 12.5%.
As noted in the last piece on A-Share Margin Investors almost a week ago, after the worst week A-shares had seen, there was money due to come in off IPO funding lock-up early this week. It came in, helping A-shares up 2+% both Tuesday and Wednesday. Thursday morning brought the news that China had proposed (subject to ratification at the Standing Committee of the National People's Congress (next March?)) lifting a cap on banks' loan-to-deposit-ratio. This should have been seen as bullish, as it has similar effects to a forward RRR cut. But after dilly-dallying Thursday most of the day, share prices plummeted 4% into the close (with small caps falling even more). It is not clear what this was blamed on. On Friday, Shanghai Composite fell in the morning, and then fell the rest of the day, ended -7.4%. Shenzhen Composite fell 7.9%, and ChiNext fell 8.3-8.9% (Price, Composite respectively). This was, in some stories in the local press, blamed on people thinking margin investors were bailing because the data showed 4 straight days of margin balance reductions.
To be sure, margin debt fell this week. Shanghai Long Margin position balances were -6.2%. But Margin Debt as a percentage of MarketCap, and Free Float, rose to record highs on Friday in Shanghai. The ongoing high margin debt to float means that the market can continue to get pushed to the downside. As pointed out in the original Margin Investors are Not Marginal, "If the market goes down sharply for whatever reason, there will be margin calls. The door is simply not big enough to let all of them out. The numbers don't look big but the arithmetic is, to borrow Stan Druckenmiller's adjective, "Horrific." There is train wreck potential in here."
Sure Friday was down 7.4% (SH) and 7.9% (SZ), but the week as a whole didn't look too train-wreck-y as stocks were 'only' down 6.4% (SH) and 8.7% (SZ). China's biggest IPO in years continued its streak of limit up days every day this week, and some 65% of Shanghai margin names saw margin debt as a percentage of free float increase this week (people cut, but some responded to margin calls with more collateral). Friday was actually worse than it looked though as 82% of Shanghai-listed shares which traded ended limit down. For Shenzhen the number was 88%. If they had been allowed to continue to fall, it could have been a lot worse. And that ignores the fact that 10% of Shanghai listed stocks and 17% of Shenzhen-listed stocks were in trading halt for one reason or another yesterday. And that biggest IPO discussed here three weeks ago saw some serious action, leaving me to think Monday will not be a good day for the stock.
It's not clear if Official China is coming to the market's rescue.
CONCLUSIONS
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