Earlier this week, Chinese stock markets posted their strongest daily performance since the 2008 financial crash as traders reacted positively to a major stimulus package announced by Beijing.
The People’s Bank of China and Chinese politburo recently announced an aggressive package of monetary and financial support in a bid to boost growth in the Asian economy. The central bank is set to cut the amount of cash that banks must hold in capital reserves by 50 basis points in order to free up around 1 trillion yuan ($142 billion) for new lending, boosting spending and investment. The PBOC also pledged to cut its benchmark interest rate by 0.2% to 1.5%.
The government is also taking steps to address the real estate crisis which has plagued the Chinese economy ever since the default of the property giant Evergrande in 2021. This includes removing many home purchase restrictions and sharply lowering mortgage rates, which the authorities hope will revive demand for real estate and prop up declining home prices.
The market has responded positively to these measures, with China’s blue-chip CSI 300 index of companies listed in Shanghai and Shenzhen strengthening by 8.5% on Monday alone. In Hong Kong, the Hang Seng index closed up 2.4% on Monday, which has now strengthened by more than the S&P500 index since the start of the year thanks to this recent strengthening.
This has caused some problems for quant funds based in China, however, many of which have taken out significant short positions on index futures. After all, earlier this year, there was widespread pessimism about the trajectory of the Chinese economy and markets. Between 2021 and early 2024, more than $6 trillion in value was wiped off stock markets in China and Hong Kong. Shorting stocks in that context would seem to make sense.
But following the recent bull run – the biggest stock market rally in more than a decade – quant funds which had taken out these positions on index futures faced massive margin calls. To complicate matters further, a technical glitch on the Shanghai bourse caused a loss of liquidity, making it even more difficult for businesses to raise the capital required to cover these margin calls. Once this capital was raised and the margin calls were met, this resulted in a further influx of cash onto the markets, pushing the price up further and worsening the short squeeze.
Regulators in China have taken steps to impose restrictions on short selling – and they may feel vindicated in these efforts as a result of the instability which quant funds’ short positions have caused this week. Earlier this year, the China Securities Regulatory Commission said it would take action against “malicious short selling” and crack down on trading behaviour that it deems to be destabilising. The events of this week suggest that tougher regulations will be in store for quant funds operating in China as the authorities seek to avoid the kind of instability seen recently.
Author: Harry Clynch
#China #Stimulus #Quants #Stocks
