The Sleeping Dragon Fights Back

As per the Bank of America Global Fund Manager Survey, the second most crowded trade was Short China equities with an increase percentage compared to August. And as history is proof, they have ended up with heavy losses in the last week. This is due to the stream of measures announced by the government.

The range of announcements impacts the credit market, real estate and equity markets. There are some other measures in the making but are due to be confirmed. The total positive impact of current announcements might be around 0.4% of GDP as per reports. 

The financial markets have already reacted to these measures as the main equity index is up by 23% within six trading days and bond yields continue to fall to lows. As the hedge funds cover the hedge funds cover the shorts at losses and build up longs. The support of RMB 800Bn to the equity market by the government will only boost the prices. 

The local impacts of these measures are positive but the global implications might create trouble. Low commodity prices might find a reason for a bottom and reversal as the data get released hereon. Global liquidity might get a boost as one of the larger economies starts back stimulus. 

This would make inflation and interest rate paths more uncertain in the coming months in addition to Japan and USA factors. It might create further volatility before normalisation in months ahead.