When The Rules Change: A Look Into Chinese Liquidity

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  • Post last modified:October 19, 2015

With the CBOE China ETF Volatility Index (VXFXI) up 50% this year, it looks like the market is pricing in a large range for Chinese equities. This is despite the Chinese government’s best efforts to reduce volatility. Their efforts include banning senior level company officials, and investors, from selling their shares for six months; to reduce an “unreasonable plug” in the market. Since enacting this new rule in Q2 2015, the iShares China Large-Cap ETF (FXI) has sunk 22% and ignited a global pop in volatility from emerging to developed markets.

Investors with more than a 5% stake in a company, who failed to adhere to these new parameters, are seeing the first wave of their fines come through from regulators in Q4 2015. According to Chinese regulatory analysts and the Associated Press, “four investors, five institutions, and eight executives were fined a total of 28.4 million yuan ($4.5 million USD).”

Sources have indicated the program might be extended or alleviated. At this time, there is not finite end to the aforementioned restriction. The market’s slide has reduced the confidence of investors and brought up many questions relating to the sustainability of China’s historic growth and market transparency. The state owned economy is expected to grow at 6% in 2015, but 6% far below China’s historic trend and self-forecasted 7% rate. Moreover, middle and lower income Chinese investors have grown increasingly skeptical of their market due to recent events.

While china’s actions have been swift and broad, including other efforts to reduce volatility like restricting thousands of listings for trading all-together and dissuading firms from shorting, the country’s efforts have caused even more volatility and news driven shocks to headline indexes. To that point, the Chinese currency has also seen multiple sharp moves of late, due to intervention and central planning.

Volatility in any emerging market (or developed market) can cause unexpected rule changes. For example, the restriction of financials stock short sales in Greece during its financial woes, to this most recent example in China. Sophisticated investors should have a “Plan B” to access the intrinsic liquidity of their portfolio, despite short sighted regulations and rule changes to markets.

As observed in China, the cost (or opportunity cost) is high when investors do not operate ethically in times of crisis. In these cases stock based loans (or loans for shares) are and efficient and quick solution for those looking to access capital against their stock positions, in emerging or developed markets
Squadron Holdings provides, and specializes, in such asset based lending solutions. Individuals and institutions receive flexible and customized non-recourse stock loans. Squadron has the ability to quickly fund large loans, especially valuable in uncertain times and regulatory environments around the globe.

Volatility in financial markets can be a time for great opportunity, but without a functioning exchange or regulatory environment, the opportunities can quickly pass. In these scenarios, stock based loans provide essential liquidity to investors in uncertain times.

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