Note: This is a continuation from the source post
The Chinese government has been panicking. They have launched a massive bailout of China’s stock markets. Desperation equals panic.
So move aside Fed’s Greenspan and Bernanke (also BoJ’s Haruhiko Kuroda), behold the Xi Jinping Put!
The Xi Jinping PUT
As previously enumerated:
The Chinese government cut interest rates, lowered of deposit and reserve ratios
PBOC injected 35 billion yuan.
Transaction fees have been cut. Margin trading requirements on collateral rollover has been eased.
Brokers have been allowed to issue short term bonds.
Chinese government goes on a witch hunt to “look for clues of illegal manipulation across markets”. Such hot potato passing the blame includes foreigners.
19 accounts have been suspended from short selling for a month
Eligibility of collateral for margin trades has been widened
All IPOs have been suspended
An assembly of the biggest brokers with US$19.3 billion fund had been recruited to bid up the markets.
China’s pension 3.59 trillion yuan ($578 billion) fund have been enlisted to support the market.
This week, the stream of government actions involved:
Trading limits have been imposed on CSI 500 futures
The China Securities Regulatory Commission (CSRC) mandated the following on state owned companies[1]:-Make major shareholders in the company buy more shares-Buy back shares of its own stock-Make directors, managers and senior executives buy stock-Introduce stock-buying incentives for employees-Introduce employee stock ownership plans.The State-owned Assets Supervision and Administration Commission, which supervises government-owned companies, ordered its provincial bureaus to compile daily reports of which state companies were buying stocks and how much they were buying
Investors with holdings exceeding 5% as well as corporate insiders or directors and executives have been prohibited from selling stakes for SIX months.
Chinese government allowed for the suspension of 1,439 of listed stocks. This has been reduced to 1,365 companies or equivalent to 47 percent of total listings on Friday following the government forced stock market rebound. Bloomberg notes that the current suspension has locked up about $2.4 trillion worth of shares, or 36 percent of China’s market capitalization.
The Chinese government prohibits or censors media from “reporting anything that might increase public fear”
Finally, the Chinese government has moved to ‘probe short selling’ as the CSRC will investigate evidence of “malicious short selling of stocks and indexes”
All these interventions have ‘successfully’ prompted for a two day government imposed massive 10.2% stock market rally! It has been a politically induced rally with about half of listed issues as NON-participant!
And the reason for the voluntary suspensions of nearly half of the listed firms, has been due again…to debt.
Much of these companies secured financing via the “equity pledge” or the use of corporate shares as collateral. So a stock market crash means either a call for additional collateral or a call on loans.
This exposes on the underbelly of the Chinese stocks.
It’s not just margin trades and shadow bank debts that has funded the manic stock purchases, but it has been also about corporate debt that have been collateralized by corporate shares.
The Xi Jinping PUT: Apres Moi le Deluge (After Me, the Flood)
Yet basically, the Chinese government transmogrified its stock markets into a buyers’ only market by compulsion, where selling or exit actions have been politically compromised.
This redounds to capital controls AND price controls or an assault on investors’ or stock holders’ property rights. Price discovery have now been based on political ukase or from the diktat of authorities.
Ethics aside, there will be massive unintended repercussions on these.
The Chinese government even vowed for the Shanghai index to recover and head back to 4,500. Yet the path to 4,500 will only mean growing dependency on the Xi Put. In addition, the path to 4,500 would entail massive accretion of debt.
Once the 4,500 gets hit, then what? "Apres moi le deluge." In modern day context, after the Xi Put, the selling deluge?
Any selling deluge arising from a withdrawal would mean another PUT. Intervention begets intervention. The system will get hooked to a government sponsored stock market ramp until…it can’t.
This means that there will be NO exit for what I would call as a King Canute syndrome.
The Xi Put has trapped the Chinese government!
The King Canute syndrome as applied to Pakistan government’s flubbed attempt to put a price floor on her collapsing stock market collapse in 2009 provides an insight.
The price floor remained in place for 108 days. What followed? Here’s SocGen’s Albert Edwards[2]: When it was finally lifted on December 14, the market, as was feared, came crashing down to the level of 4782 points in fewer than fifteen sessions (another 52%decline in addition to the previous 40% decline)
Apres moi le deluge.
But Pakistan’s experience has been peanuts to the Xi Put
This reminds me of US stocks which has become entirely dependent on the Fed’s zero bound, such that a mere 25 bps of increase sends shudder to the markets, so the US Fed spends all their time looking for excuses to delay tightening.
Yet I find it absurd for the consensus to diminish the effects of a China stock market crash by rationalizing how stocks have been “small” relative to the population or to the household assets.
Credit Suisse estimates 258 million stock trading accounts. But these accounts are held by some 90 million of retail investors, 80% of which have been urban households whom have placed 30% of their cash reserves into stocks.
Based on 2009 data, Thailand has 5.3% of her population invested directly on stocks. I’m quite sure that such numbers have been smaller in 1997, but this didn’t stop the Asian Crisis from happening.
As noted above, household assets have been used as a pretext to downplay the risks from China’s stock market crash.
From the surface, the ratio of household deposits as % of the stock market cap would seem that way (upper left, chart from BCA Research). Household deposits have not reached the same magnitude as in 2007 which imply lesser household deposits exposed to the bubble.
But in further examination, there has been more than meets the eye.
First, post 2007 crash, China’s household deposits (as % of stocks) have never recovered to the 2007 highs, the question is why?
From the partial recovery in 2008-2009 coming from the 2007 crash, the Shanghai index remained downhill through 2014. That’s an agonizing 7 years of bear markets! (see bottom chart)
Given that household deposits FINANCED the stock market bubble in 2004-2007, the excruciating bear market impeded the recovery in household deposits.
Yet increases in household deposits depend MAINLY on income. This either implies slower income growth from 2009-2014 or that household deposits could have been used to FINANCE China’s property BUBBLE! Or both.
Second, margin debt has hardly been an issue in the 2007 crash.
Today, there has been a spike in retail accounts PLUS the skyrocketing margin debt (see right window from Money and Banking).
The same chart shows that Chinese population in stocks have even been significantly smaller in 2007 yet the market crashed.
But that’s not the point.
The gist of the matter have been that of the RADICAL changes in the CHARACTER of financing of the stock market bubble. Because the Chinese has smaller household deposits today, they have resorted to financing their stock market gambling with COLOSSAL debt—debts from broker’s margin, from the banking system or from shadow banks.
Household deposits alone don’t explain why Chinese are less prone to risks. Instead the change in the way bets have been made by the average citizenry on the stock markets has been the crux.
If the slow pace of recovery of household deposits has been due to lower income growth, then given the huge debt exposure, stock market losses would mean insufficient income/deposits to sustain the cost of leveraged stock market bets by domestic punters. Many Chinese gamblers will end up bankrupt!
This will be even more elaborate if the slow growth of Chinese household deposits has been due to the financing of the property bubble. Punters will now have two debts to service. Yet crashing stocks will serve as double whammy to these punters.
And if property prices crash, it should be a perfect storm. The losses from the stock market crash will into parlay or get transmitted to the property sector.
Moreover, to satisfy debt liabilities, in the face of inadequate income, one of these assets will have to be unloaded.
If stock market selling has been prohibited, then selling will be on other assets. Considering that property has widely owned, then selling of properties should be the next logical option.
Thus, China’s dual bubble will implode!
Credit Suisse says it’s a triple bubble (investment, property and stocks). It’s really a credit bubble with ‘bubble’ assets as symptoms of the disease.
Given this outlook, it’s no wonder the Xi government has been in a panic.
Crashing stocks will extrapolate to social instability or unrest, which perhaps severely increases the risks that the ruling party might be overthrown.
And this has chimed with last week’s passage of the “national-security law” by the Chinese government, which according to the Wall Street Journal, expands the definition of threats to the state to cover almost every aspect of domestic life, including “financial risk,” as well as international affairs. The law explicitly states that economic security is the foundation of national security[3]
The draconian intervention in stocks will likely extend to the economy where economic reforms will either be stalled or reversed. The “national-security law” throws the gauntlet on such centralization.
The Xi Jinping PUT may likely undo the much touted “China century”.
Crashing Stocks Increases Risk of Financial Crisis
Let me add that major financial crises have usually been accompanied by crashing stocks. But NOT all crashing stocks lead to financial crisis, e.g. Wall Street’s Black Monday 1987
To cite a few major examples of crashing stocks that was followed by financial crisis or recessions.
Japan’s stock market crash in 1990 led to an economic recession in 1991 and subsequently an era of two and half economic “lost decade”.
ASEAN stocks crashed in February 1997, 5 months later the Asian crisis emerged.
US dotcom bubble crashed in March 2000, one year after or in March 2001 the US economy suffered a recession.
There are two reasons why the Chinese stock market crash in 2007 did not lead to a recession or crisis. One, the stock market bubble had mainly been financed by household deposits. Two, the Chinese government launched a gargantuan $586 billion stimulus 2008-9.
Then Chinese balance sheets of both the private and the public sector had been a lot healthier. Not today where China’s banking assets have been nearly double that of the US.
Unfortunately, today’s stock market-property bubble has been an offspring of the Chinese 2008-9 stimulus.
Thus the consequences from a China stock market would likely be dissimilar. It will most likely be accompanied by serious financial, economic and social repercussion.
Hardly anyone asked, why the panic after all?
Apres moi le deluge
Note: Here is a tip for the South China Sea imbroglio. It’s called watch the fires burn across the river. Paradoxically, it’s a Chinese war stratagem—a most likely dose of their own medicine.
Note: Here is a tip for the South China Sea imbroglio. It’s called watch the fires burn across the river. Paradoxically, it’s a Chinese war stratagem—a most likely dose of their own medicine.
[1] Quartz China stabilized its markets by forcing companies and their employees to buy shares July 9, 2015
[2] David Keohane An homage to China: “even the Karachi Stock Exchange didn’t come up with something like this”! FT Alphaville July 10, 2015
[3] Wall Street Journal, Beijing’s Response to Stock Selloff Reveals Deep Insecurity July 7, 2015
No comments:
Post a Comment