The Great Bubble Of China: The Beginning Of The End…Or The End Of The Beginning?

Man, oh man. Macro Man isn’t sure if it’s the cold, rainy “barbecue summer” or the unpleasantness of being crammed into a sardine-can train carriage chock full of sweating, flatulent commuters. Or maybe it’s the jackhammer-level noise in financial markets. Either way, he’s looking forward to his summer holiday, which thankfully begins on Friday. While he’ll not be able to fully escape from the tentacular grip of financial markets, at least he can be assured of warm weather and a lack of train journeys.

In any event, the noise level was cranked up as Macro Man made his way from the station to the office this morning, as Chinese equities finally- finally! - cracked lower on stories of a reining in of rampant bank lending in H2. While the Shangai Comp fell as much as 7% over the course of the day, it rallied slightly to close down “just” 5%.

The reaction of other asset markets was all too predictable. FX carry, particularly EM, was hit hard, as were EUR/USD and yen crosses. Western equities also dipped sharply, and fixed income caught a tasty bid.

The panic lasted, oh, a good twenty minutes before markets were distracted by a shiny object lying on the ground nearby and moved on to a new “theme.” Indeed, Eurostoxx are up nearly a percent on the day and nearly two from the post-Shanghai lows. Macro Man would be curious to hear if any readers are finding much success trading these “five minute macro” markets of the past few days, because he sure as hell isn’t.

He feels like he’s in the famous “Far Side” lemming cartoon….and he’s not sure, despite his best efforts, that he’s the one with the inner tube.

In any event, how significant is this downdraft in Shanghai? It is sorely tempting to point a figure, laugh the Nelson Muntz laugh, and expect a huge puke from here.

Macro Man isn’t so sure, however. He vividly recalls a “turning point” 8% sell-off on 27 February 2007 that sent markets into a tizzy (and your author, who was awaiting just such an event, into full-blown “risk-off” mode.) The index proceeded to rip off another 30% rally in the ensuing seven weeks or so.

What’s interesting is that someone has already started betting on a China downdraft. The UltraShort FTSE/Xinhua China25 ProShares ETF (FXP), the double-short China one, has seen an explosion in volume over the last month. Coincientally (or not,as the case may be, given the current state of crony capitalism), FXP had its highest volume ever yesterday.

So is this the beginning of the end for the Great Bubble of China? Or is it merely, to quote Churchill, the end of the beginning? Macro Man has long thought that the authorities would try and keep all of the balls in the air until the 60th anniversary celebration of the PRC on October 1. As of yet, he doesn’t see cause to change that view.

One thing’s for certain, though: things have just become a bit more interesting.

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