Regulatory Crackdown Leads to Stock Market Smack Down

After already targeting big tech, Beijing unveiled new measures last Friday which targets the for-profit tutoring schools who focus on core school subjects. The CSI education index (.CSI930717) has fallen over -10% since Friday, 4.9% of which was yesterday and closed to a 16-month low. The CSI300 is down nearly -8% since Friday and sits at its lowest level since November.

Contagion sets in

However, the selling has not been confined to China’s onshore markets. Rumours were circulating that Chinese-assets were being offloaded by US funds and that foreign capital will continue to flow out of China’s stock markets. This then weighed on the prices of Chinese firms listed on US markets with Alibaba (BABA) falling to its lowest level since March 2020. The Nasdaq 100 fell -2% from its record high earlier in the session and the S&P 500 was off by -0.5% by the close.

The Hang Seng fell -4.2% by yesterday’s close to its lowest level since November. Currently down -8.2% this week and -12.9% this month, the index has fallen -20.6% from its February which means it has entered a technical bear market. And over half of those losses have occurred over the past three days. The Hang Seng China Enterprise index (HSCE) fell -5.1 %during its worst session since February 2018. Tancent Holdings (0700.HK) fell -10% during its most bearish session in nearly ten years, and e-commerce giant Meituan (3690.HK) fell -17.7 during its worst session on record.

We can see on the HK50 daily chart that bearish momentum accelerated below the 200-day eMA on Friday. Whilst Monday’s sell off stalled above a support cluster around 26,000, yesterday’s price action made light work of it to fall below 25,000 for the first time since April. Technically the index continues to look weak beneath the 26,000 resistance zone but one may want to question the reward / risk ratio for bears at current levels.

Perhaps a more logical approach is to wait for volatility to subside and see if it can build a base above the 24,000 support zone, which sits between the 161.8 and 138.2 Fibonacci extension ratios. And a potential catalyst for a counter-trend move would be if Beijing step in an support the market.

Plunge protection team to the rescue?

Bears aside, most people don’t like stock market selloffs. And governments are no exception. So with rumours circulating that foreign investors are fleeing onshore markets it is possible we may see the stock market become artificially supported by the so-called ‘plunge protection team’, where institutions are orders to buy at market to limit downside potential. However, whether that will occur or when remain unknown. But previously, if word gets out that China’s markets are being supported, it has provided buying opportunities for investors as risk sentiment rebounds across the globe.