China A-Shares - 1, 2, 3 (trillion RMB)

(Jul 18 2015) - Pre-open last Friday (Jul17) local media suggested China had received some 1.3 trillion RMB in loans from banks to buy shares as of July 13th. The FT parroted that with a $200bn headline quoting a Cajing article (quoting unnamed sources) that 17 commercial banks had provided 1.3trln RMB of financing to the China Securities Finance Corporation to buy stocks.

A slightly later version of the article from Caijin suggested the credit line was 2 trillion RMB currently. After the close on Friday, a Bloombergarticle upped the total number available to support stocks to "up to RMB 3 trillion."

3 trillion RMB is more than TWICE the current size of the total official margin position. It is just under 15% of the free float of ALL China-listed shares. If 3 trillion were spent to buy the index weights of all listed shares in SHCOMP and SZCOMP, they'd only get 40% of the way through the money before they ran out of PetroChina shares - the biggest weight in A-shares. And that assumes that everyone in the float could sell, which is not the case given the new rules discussed in last week's A-Shares: To Equanimity and Beyond!

This money is backing for the CSF - which at this point should almost be considered an extension of the CSRC and the desires of the highest political circles to see stock prices not fall - and the implications for brokers and the margin market, A-share volatility, and intra-market torsional movement are very interesting.

• The evidence available is that the CSF is buying both large caps and small caps.
• Don't expect more brokerage share issuance.
• A-share index volatility will continue to fall.
• Expect that weakness in small caps will be countered by strength in megacaps.
• If small caps fall further, expect new ETF creation with more breadth, so that ETFs can support them too.
• The manipulation of Chinese stock markets by authorities will mean foreign investors will seek interesting things to do elsewhere. I expect Japan and HK to be beneficiaries.

For SmartKarma subscribers, there is a recap below the fold.