China's favourite (non currency) band

Who knew that the Sundays, an English indie band that broke up in 1997, were so popular in China? On the same day that Macro Man quoted one of their songs in reference to the end of the Chinese stock market bubble, darned if the authorities didn’t raise the stamp duty on transactions from 0.1% to 0.3%, prompting a 6.5% decline in Shanghai A shares and 9% drop in B shares.

Of course, this pullback took the year-to-date gains in A and B shares to 51% and 133%, respectively- still pretty heady stuff. And when you’re playing for those kind of serious returns, does it really matter if the cost of trading rises from a fraction of a percent to a slightly larger fraction of a percent?

Macro Man would not have thought so, but history suggests otherwise. Two previous stamp duty hikes have provoked bone-crunching declines in Chinese equities. In 1992, the imposition of a 0.3% stamp duty was followed by a 70% decline. In 1997, a rise in the duty from 0.3% to 0.5% was followed by a 75% decline (as well as the Asian currency crisis, coincidentally.)

Ultimately, with Chinese equity volatility this high, and participation so widespread, the rise in the duty should have little impact. Macro Man saw one estimate based on turnover data that the rise in the stamp duty would cost punters 2.8% per year: fairly small beer for indices that move as much as China’s. Yet it is often the last straw that breaks the camel’s back, especially when risk premia are as low as they are at present. Ironically, the US market could be a (relative) star performer if the China malaise were to last for more than a day, given the large short interest on the NYSE and the market’s reported affinity for long Europe/short US spread trades.

(UPDATE: As an aside, isn't this a lot like February? China meltdown on the penultimate day of the month...all we need now is ADP to print 200k and send bond yields screaming higher....)

Elsewhere, the ongoing squeeze in funding currencies (the yen excepted) certainly suggests that markets are cruising for a bruising. Fortunately for Macro Man, even the squeezes are getting squeezed, and the SGD 1 year payer position is now comfortably in profit.

As has been the case for much of the past few weeks, Macro Man is torn between tactical concerns on risky assets and more structural bullishness. News that Russia is formally drafting legislation to allow the state pension fund to purchase domestic equities, erstwhile rock stars that have fallen on hard times recently, is emblematic of the underlying demand for risky assets from sovereigns as well as private sector investors. And lest anyone doubt whether emerging markets are providers of liquidity and/or running overly loose monetary policies, have a look at Russia’s year-on-year M2 growth:

At 57% y/y, is it any wonder that Russians have so much money to play around in equities, commodities, and foreign exchange?