Those who have been following the ridiculous moves in the Shanghai Composite in recent months, knew it was only a matter of time before yet another major stock market (one which recently surpassed the Nikkei for the second largest spot in the world) crashed violently, further eroding faith in the centrall-planned “price discovery” process. The only question was when.

Following our report last night about China's change in collateral rules, in which we noted that none other than the PBOC was now eager to pop the equity bubble following the PBOC simultaneously fixing the CNY significantly stronger (implicit tightening) and enforced considerably stricter collateral rules on short-term loans/repos – a move which according to estimates from Shenyin Wanguo Securities, would disqualify some 1.25 trillion yuan in corporate bonds as repo collateral, or 60% of all outstanding corporate bonds listed on China's two stock exchanges – we were not surprised to see the tumble in the market-traded Yuan (which crashed the most in 6 years), and the surge in interest rate swaps, coupled by the plunge in corporate bonds. The only thing that puzzled us was why, after the correct kneejerk reactionlower in the Shcomp, did stocks proceed to surge even higher.

That said, we summarized it as follows:

We Following our report : “We will see what kind of fallout this creates but for now stocks are holding up as FX and bond markets are turmoiling.”

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We didn't have long to wait, because literally a few short hours after we wrote that sentence, thishappened:

Because the higher they rise the quicker and more violently they plunge.  Here are the details via Bloomberg: