The Shanghai Composite Index rallied by 5.8% in the session, posting its biggest daily gain in more than six years, while metal prices also rose broadly in the session, after hitting or ending at their daily downside limits on Wednesday.
to see our rolling report on the London Metal Exchange and Shanghai Futures Exchange.
And here, Metal Bulletin takes a look at how recent events in China have affected the nickel market
and aluminium prices
Broad implications and outlook
The fall in Chinese stocks began after a clampdown by the state regulator last month on margin finance or loans that investors are able to bet on shares.
As brokers tightened the requirements for lending to investors, a selloff followed with traders forced to meet margin calls. The wider implication for investors is they might have to sell other assets in order to meet these margin calls if the downtrend in stocks continues.
This is why commodities also are affected.
In the past month, the Shanghai Composite Index has fallen 46%, compared with an over 150% jump in the year to mid-June 2015.
Panic aside, the Shanghai Composite is still about 70% higher than it was in July last year.
“The stocks gains this year were exaggerated and the recent falls are a logical correction,” one source at a company providing financing to traders told Metal Bulletin.
Fundamentally, the economy is not doing well enough to support share prices, a senior broker in Asia added. “[The recent rout] is a correction though it seems too much or too heavy,” he said.
And both domestic and ex-China market participants are closely watching whether the recent falls will spill over to affect the country’s banking system.
There are worries that local banks will be more stringent when extending loans after recent sharp falls in stock and commodity prices, which would certainly bite into local economies.
And Hong Kong-listed Chinese metal participants have also suffered
at the hands of this week’s landslide.
On Thursday, Hong Kong Futures Exchange Limited announced an upside adjustment in minimum margins for securities, including Aluminium Corporation of China (Chalco).
“Aside from the high volatility in the stock markets, a potential question is whether the current situation would have any impact on the banking system and the broad economy,” UBS analysts said.
“From a macro perspective, we believe China’s broad monetary easing cycle will continue, and CIO still expects two more interest rate cuts in the next 6-12 months and a reserve requirement ratio (RRR) cut in the next six months,” the analysts said.
“It is estimated that every 100-basis-point cut in RRR could potentially release around CNY 1.3 trillion of liquidity into the economy,” UBS added, speaking on the potential effect on the banking sector.
Investment bank Nomura offered this analysis:
“There used to be a correlation between equity market performance and consumption or production, but this has weakened since 2011 and almost faded last year. The mechanism that channels the paper wealth of the equity market into real household consumption demand is limited in China.
“First, Chinese households have a much higher savings rate than those in many other economies, which lowers the theoretic wealth effect on consumption.
“Second, the rapid swings seen in the equity market has resulted in the transference of wealth, rather than the creation and destruction of wealth. While undoubtedly many households have been hurt by the plunge, many others would have sold and profited. Importantly, despite the market coming off, on a net basis the SHCOMP (Shanghai Stock Exchange Composite) index is still 70% higher now than it was in mid-2014.
“Third, much of the equity outstanding is held by the government, local governments and state-owned enterprises (SOEs), who now have to shoulder an even larger share of the nominal wealth loss than the private sector,” according to Nomura.
Citi sees a “stronger metals market emerging by end year”, but weaker coal, oil, grains and oil complex commodities.
“Commodity markets are likely to remain volatile, but with the Chinese government looking likely to overcompensate, an aggressive rally may well be next,” ICBC Standard Bank said in a recent note.