Chinese Government Sticks to the IPO Route to Inflate Stock Market Bubble

It appears that the Chinese government sees the current melt-UP in stocks as a wonderful development.

Since the “targeted easing” in June combined by the IPO price controls which I reported last August, the Shanghai Composite Index has gone parabolic—up by about a fantastic 38% as of yesterday (still up today)

The Nikkei Asia on the government’s sustained IPO price controls or stock market management (bold mine)

Chinese authorities are telling companies planning initial public offerings to keep prices low in an attempt to avert a broader market decline, a factor that is fueling the overheating of IPO stocks.

Because the China Securities Regulatory Commission makes the final call on whether a company can go public here, businesses have no choice but to heed its wishes.

And because artificially priced IPOs have been seen by the public “sure profit source”, demand for IPO has basically gone berserk.

From another Nikkei Asia report (bold mine)

Investors placed about 1.43 trillion yuan ($232 billion) in bids for initial public offerings in China between Nov. 24-28, a nearly five-year high on a weekly basis, in a rush to profit from the underpriced issues.

New public issues are sold to individuals mainly through the Internet. The majority of the investors hail from the wealthier classes and have previous trading experience. The larger the bid, the higher the chance of winning it, and many go so far as to borrow money to inflate their offers.

Retail investors lever up on manic-hysteric stock market speculation. So to resolve China’s gigantic debt-property bubble means to induce the same people to rack up more debt to speculate on stocks!

More affirmation of my theory of the politics of monetary easing policies: I recognize the problem of addiction but a withdrawal syndrome would even be more cataclysmic.

Of course it’s not just IPOs but a string of interventions that has juiced up Chinese stock market hysteria, as I earlier noted: the Chinese government has launched “targeted easing” last June, has resorted to selective bailouts of firms which almost defaulted last July, imposed price controls on stock market IPOs last August, injected $125 billion over the last two months. Last week, November 17, the much ballyhooed China-Hong Kong connect went on stream.

One can add the streamlining of foreign proceeds from overseas IPOs plus the latest non-sterilization of recently injections of funds

Mainstream seem to recognize these. Again the Nikkei Asia

The heightened demand for cash from these IPOs is also affecting monetary policy. The People's Bank of China injected about 50 billion yuan into the market on Nov. 21, and said it will supply liquidity through various policies in a statement that day.

The bank then skipped its open-market operations on Nov. 27 for the first time since July, opting to satisfy the short-term demand for cash instead of draining the market.

So the PBOC feeds on the bubble by providing even more liquidity (access to credit).

The PBoC solemnly abides by what their inflation deity has prescribed or ordered (bold added): Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.(JM Keynes, The General Theory of Employment, Interest and Money)

Unfortunately all quasi-booms morphs into bubble busts.

Stocks are not about economic or earnings growth anymore as these have mutated or deformed to reflect on government's policies of credit and liquidity expansion designed to stimulate the "animal spirits" based on "HOPE" of economic salvation from free lunch policies.

So it's really sad to see how the Chinese government continues to lure the average citizenry to chase one bubble after another (from stocks to properties to shadow banks back to stocks) where their citizenry will eventually end up substantially poorer.

This is a sign of desperation rather than a sound boom from economic recovery.  It's a recipe for a total economic collapse.

Again for the Chinese government, HOPE has become the only policy strategy.