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China Market Report - Analyzing the June Liquidity Squeeze - July 2013

Chinese equities lost more than 14 percent during June 2013 when interbank rates rose rapidly. In this report, we analyze June’s substantial losses through the lens of the Barra China Equity Model (CNE5). Our analysis of factor returns and volatilities shows how different market segments reacted as the People’s Bank of China (PBOC) stated that the burden should be on the lenders to better manage their balance sheets.  Finally, we examine two specific portfolios: minimum volatility and diversified financials, highlighting the drivers of their returns during June 2013.  We find that exposures to CNE5 style factors have been a significant driver of performance for both portfolios.