Chinese stocks closed lower by about 5% overnight, as the margin selling spiral continues downward.
–this very strongly suggests that some margin accounts that have enough equity in them a day ago are under water now. So Shanghai and Shenzhen will likely open tonight to more selling.
–to be clear, I don’t know exactly how Chinese margin works. And, because I have no intention of buying A shares, I have no desire to find out. A logical step for authorities to stop forced selling would be to loosen margin collateral requirements. It may be, however, that the government has decided that the best course is to wring speculation out of the market as quickly as possible. In other words, despite its rhetoric, it’s content to see the selling play itself out fully.
–margin players tend to be their own worst enemies. Taking both their margin and cash accounts into consideration, they tend to have a mishmash of high quality stocks and speculative junk. Their margin accounts tend to be heavily weighted toward trash. The junk is what’s most vulnerable to price declines, since it has little, if any, intrinsic merit. The logical response to a margin call is to sell the trash and keep the quality names. Margin players, in my experience, invariably do the opposite. They sell their winners and keep their losers, exposing themselves to continuing margin calls and prolonging the overall market agony beyond what it should be.
–I’m still guessing that the current selling will exhaust itself within two weeks.