OVERNIGHT

From the looks of it overnight those circuit breakers broke down themselves as The Shanghai Composite Index dropped again even after official injected some monetary Valium into the markets on Monday to settled frayed investor nerves.

After falling nearly 7% on Monday, its worst start on record, the benchmark bounced up and down like a yo-yo between 1% and 3.2%, according to the WSJ. Reuters reported that officials were "reviewing whether to regulate share sales by major shareholders and executives of listed companies, hinting that it may restrict the proportion of shares they can sell during a given period of time."

Earlier in the day the PBOC poured 130 billion yuan in short-term funds into the system and also intervened in the foreign the exchange market to put a net under the weakening yuan, sources said.

In other markets, Australia, Hong Kong and Japan were all down.

 From down under, Business Insider Australia, we get this:

After rattling financial markets for large swathes of last year, it didn’t take China’s economy long to resume that role in 2016. In just one session – less if you count China’s stock market having to close early to prevent even greater losses – the second largest economy in the world wrought havoc, rattling markets around the world. It was certainly not the start to the trading year that many had expected.While the volatility in Chinese markets has ebbed today, not everyone believes the relative calm in China will last. 

According to David Cui, Tracy Tian and Katherine Tai, China equity strategists at Bank of America-Merrill Lynch, financial system instability in China is likely to be the rule, rather than the exception, in the year ahead. 
The crux behind their call is China’s ballooning private sector debt. Here’s BAML:

China’s private debt to GDP ratio rose by 75 percentage points between 2009 and 2014, by far the highest among the 40 economies with data (together with HK). At the peak speed, over the 4 years from 2009 to 2012, the ratio in China rose by 49 percentage points. Historically, any country that grew debt this fast inevitably ran into financial system problems, including currency devaluation, banking recap, and high inflation, and we do not expect China to be an exception. We believe that the government had maintained system stability over the past few years by allowing various implicit guarantees to get firmly entrenched, which has made the financial system fragile. This is a classic case of short term stability breeding long term instability, in our view.

This chart from BAML shows the growth in private sector debt in the five years between 2009 to 2014, expressed as a percentage of GDP. Clearly there were two standout performers who racked up debt at a breakneck pace over the selected time period.


Cui, Tian and Tai believe investors have become complacent about the potential for increased instability, and have been lulled into a false sense of security as a result of various short-term solutions introduced by the government to stymie volatility.

Avoiding a sharp slowdown in GDP growth by running pro-growth macro policies. Allowing the renminbi to gradually appreciate against the US dollar, at least until recently. Continued support for the nation’s stock and property markets. Avoiding a major debt default, shielding those who were unable or unwilling to effectively price risk appropriately to escape with their capital intact. More:

businessinsider.com/why-one-bank-thinks-chinas-markets-could-unravel-2016