A-SHARES & LEVERAGE - "Index Adjustment Can't Be Avoided in the Short-Term"? (Xinhua)

Xinhua News Agency told us in a flurry of four articles yesterday the previous day's sharp fall "wasn't the end of the bull market, but could "help the market enter "slow bull" mode advocated by regulators." Upping IPO releases wasn't aimed at suppressing the market but the purpose is to "balance supply and demand" and Xinhua helpfully told us "China's bull market will continue as monetary and fiscal policy will keep easing, China's market faces low systemic risks, and more and more people are selling other assets and buying stocks. The article also helpfully told us "index adjustment can't be avoided in the short-term".

Net result, Xinhua is telling everybody to buy the inevitable dip which it is guiding to.

Two more news stories out this AM offer insight what regulators may be doing to dampen upside, and possibly cause that dip.

• China Business News reported that China Securities Finance recommended further controls over margin trading at a "Liquidity Risk Management" seminar.
• The China Securities Journal reported that regulators are asking banks to "Strictly" scrutinise the whereabouts of bank funding because they have noticed that some of it has gotten into stock markets.

Xinhua has more articles today saying the market 'misunderstands', and that things are not so bad. Regulatory China wants a "slow bull" mode for markets, and it really wants to bring down rampant and uncontrollable leverage, but it wants an orderly correction in order to get there.

Separately, one note on A-share leverage was published yesterday by a Hong Kong based analyst/strategist at a Certainly Sophisticated bulge bracket investment bank. The numbers described are a fair bit larger than what I have written about. He describes the difficulty of obtaining data or assessing its accuracy, and says this is probably a problem for regulators. Regular readers will know I completely agree.

MAIN POINTS DISCUSSED BELOW

• Details of the CBN article about the CSF's main recommendations indicate a very near-term cut to the potential ceiling of margin trading overall (which, when combined with the swaps leverage, is much closer than it appears), and specific cuts to investors' ability to continue margining existing positions. I expect margin calls to result, and I expect margin balances to fall.
• Details of the CSJ article on regulators' scrutiny on bank funding going to the stock market suggest that a) Umbrella Trust leverage will have to fall more, b) banks will be encouraged to not allow unsophisticated investors to use them, and c) regulators could shut down direct trading by sub-accounts, which has big consequences.
• The arithmetic of the Cogently Scrutinized report's numbers suggest to me a much bigger risk than most A-share investors see. I show that the arithmetic of what happens if the stock market falls, causing unwinding, is not pretty.