Mutual trust is certainly not there any more, and it will be very difficult to restore,” Issing, 79, said in an interview. “The idea -- you might now say the illusion -- was and is that having joined the euro, it is irreversible.”…“I would be quite confident that if governments and people in other European countries see the mess, the chaos, which will accompany Greece for some time to come, they will undertake the utmost efforts to avoid repetition of such a situation,” he said. “All the others have to really commit themselves.”… “If the Greeks can get away with the violation of all promises, commitments, then I think it will have a contagion effect on other countries,” he said. “Podemos will then tell their voters: ‘the hardships are not necessary.’ Then we’ll be entering into a monetary union very different from what was intended -- it will be the end of the zone of fiscal solidity.”—Otmar Issing, former European Central Bank Executive Board member in a Bloomberg interview on the illusions of irreversibility of the euro
In this issue
Phisix 7,500: Why Has Domestic Media Been Panicking Over Greece?
-Philippine Media Panics Over Greece Crisis!
-Greece Crisis: The Butterfly Effect of the Chaos Theory
-Listing at Philippine Online Job Markets Crashes in April and in May!
Chinese Government Panics Over Crashing Stocks, Launches More Rescue Programs!
Phisix 7,500: Why Has Domestic Media Been Panicking Over Greece?
Philippine Media Panics Over Greece Crisis!
If you haven’t noticed, this week mainstream media has been abuzz about how the Philippine economy should be able to withstand the Greece crisis (see Rappler, Businessworld, Philstar, CNN Philippines among the many others)
The Inquirer, which has the widest news readership among the upper segment of society, even reiterated this pitch THRICE in an astounding span of FOUR days!
The stunning seemingly orchestrated media blitz has obviously been designed to assuage the public from a panic.
On Wednesday, the leading news network quoted experts who rightly said there was ‘very limited direct links between Asia and Greece’. However, the expert seem to have pushed back on the thrust to put an entirely positive spin on the Philippines by noting that “What matters more from an Asian perspective is not so much the crisis in Greece itself, but whether a “Grexit“ causes significant disruption in the wider eurozone economy. Some of Asia’s most trade-dependent economies, notably Hong Kong, Singapore and Vietnam, would be hit hard if exports to the eurozone fell sharply. The impact of a “Grexit” on global financial markets could also cause problems in the region.”[1]
So perhaps, given the agnostic undertone, and also maybe because stocks closed slightly positive only .14% that day—which recovered intraday from a substantial early 1% decline—helped by the index managers (especially with the trademark closing session pump), the same media outfit came out the next day with a much bolder claim stating that “remittances will remain safe” and that local banks had “ZERO Greek assets”[2]. The article goes on to cite statistics from Bangko Sentral ng Pilipinas officials as evidence of ‘strength’.
Following Friday’s stock market slump, the same outfit came out with another blazing business headline on the following day to declare that the Philippines will be ‘shielded’ from the effects of the Greek default[3]. The article was predicated again on views backed by statistics of the administration’s finance secretary.
Funny but why all these?
Yet what is the retribution for a wrong call by political agents? Will they be fined, terminated or incarcerated? The obvious answer is NO. These agents will appeal to external factors as alibi for their mistakes.
On the contrary, a recession or a crisis will likely prompt these political agents to demand more funds to justify interventions (bailouts) for supposedly the public’s weal.
Also the gullible public will likely forget such claims and fixate on leaking their financial wounds.
And because political agents have virtually NO skin in the game, they will say what they are required to say in order to satisfy the objectives set by their political masters.
The same applies to establishment media, who act as loudspeakers for entrenched political interests
And like mainstream promoters of the bubble, media and their populist experts will adapt the JM Keynes’ sound banker escape approach: “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him”
So shift the blame to force majeure to elude accountability. Such malady can already be seen in the domestic casino dynamics where experts blame the ignorance of ‘everyone’ as excuse to their blindness.
First of all, why the need for the seemingly intensive coordinated publicity campaign offensive if it there has been truth to the claim that the Philippines economy will weather the Greek Storm?
Perhaps officials do NOT believe in what they are saying? Or could it also be that the private sector has become so obtuse to appreciate the supposed inherent strength of the Philippine economy for them to easily succumb to fickleness that requires expectations management by media and by authorities?
For me, such media barrage to put a cosmetic spin on the Greek impact represents a sign of DESPERATION to prop up a decaying façade, if not a massive DENIAL in the face of the current deterioration of the Philippine economy.
Second, many of the cited statistics, the factoids used as the Talisman effect—to ward off the risk devils—have based on PAST conditions.
Should a Greek-induced European gale occur, there will be radical changes in the financial economic environment that will put to a test, or at worst, even negate what has been seen as advantages. Life is dynamic and NOT static as those statistical numbers suggests.
YET many of those numbers DEPEND on EASY MONEY conditions which will evaporate once a crisis surfaces.
The proof of the pudding is in the eating.
Third, media’s expectations management severely lacks historical relevance. For all the supposed strength of the Philippine economy, a major financial global hurricane as in the financial of 2007-2008 brought the domestic stock market to her knees which lost even more than the US, the epicenter of the crisis. This happened even when earnings growth remained POSITIVE and declined by just 20%. More importantly, the 2007-8 episode almost dragged the statistical economy to a recession.
Yet because of the relatively healthy (substantially less leveraged) balance sheets then, the BSP’s 2009 negative real rate (zero bound) stimulus generated substantial “traction” to fuel a strong recovery that has underpinned the current boom. That’s the reason I accurately predicted the boom phase of the real estate sector[4]:
For all of the reasons mentioned above, external and internal liquidity, policy divergences between domestic and global economies, policy traction amplified by savings, suppressed real interest rate, the dearth of systemic leverage, the unimpaired banking system and underdeveloped markets—could underpin such dynamics.
Those conditions have now reversed. Balance sheets have become deeply leveraged, and subsequently, have become highly sensitive to interest rate rand credit risks. Also the invisible redistribution from the credit boom has have begun to hurt both consumers and the industry through the price transmission channel. The feedback mechanism between debt and growth has begun to affect the economy. (as discussed below)
Thus, once a global financial crisis 2.0 occurs, the Philippines will fall into a recession if NOT a crisis, along with our neighbors. It will be partly be Asian crisis 2.0.
Greece Crisis: The Butterfly Effect of the Chaos Theory
Fourth, I quoted on my headline one of the highest former ECB high ranking official Ottmar Issing on his observation of the Greece crisis. Does he believe that Greece has been an isolated case? The answer is NO. Mr. Issing has been concerned about two major issues: contagion and mistrust that could DAMN the euro!
Unlike domestic mainstream media, their quoted experts and political authorities, who sees the Greek crisis as limited to simple linkages, the GREECE CRISIS signifies a symptom of an underlying DISEASE. The disease of which have been MALINVESTMENTS.
And MALINVESTMENTS have represented the offspring of a monetary union that has been spawned to promote political ‘deficit’ spending profligacy (mostly through welfare programs), free loaders (such as the crisis affected Euro nations: Greece, Italy, Portugal and Spain) and bailouts. Such malinvestments has been enabled and facilitated by LOW interest rates and expansionary monetary policies that have been channeled through rampant accretion debts (presently government debts). I discussed the EU’s interest rate convergence which impelled for the previous European boom here.
So when free riders run out of other people’s money to spend then insolvency and illiquidity happens.
Greece has been bailed out twice in May 2010 and February 2012 but today’s continuing crisis reveals that things have gotten worse. So instead of productive reforms, bailouts have only translated into dependency and wastages.
True, Greece accounts for only .39% (2013) of the global economy and 1.3% of the Eurozone economy, but her government has a substantial debt exposure to the tune of 177% of her GDP that’s 77% more from whence she joined the Eurozone in 2001. Combined with private sector debt, McKinsey Global estimated Greece’s debt to GDP at 317% as of the second quarter of 2014.
Importantly, over the course of her bailouts which resulted to a shift in the composition of creditors from the private sector to the public sector as I earlier described here, this also implies of a transfer of risks from the private sector to taxpayers.
The transfer of risks from private to public sector does NOT mean the elimination of risk. Again this simply means that the profile of Greek debt holders changed from bankers (who had been saved) to taxpayers (who now assume the risk). (see Bloomberg charts above)
Also such does NOT take away that the risks of private sectors banks from Greek exposure. Instead it shows that EU private banks as INDIRECTLY exposed to the Greek crisis through their holdings of European sovereign debt that have DIRECT links with Greece.
So if the troika (EU, ECB and IMF)-Greek impasse will unsettle the markets, the impact will run from holders of Greek debt, viz troika and the EU governments, to the government holders of Greek debt, particularly banks and financial institutions.
Let say the Greek crisis will raise concerns over Italy’s over €60 billion exposure, so if Italian bonds will take a hit, the chain effect means that Italian banks which has material exposure on Italian sovereign debt should take subsequent losses. And how about the non Italian bank holders of Italy’s debt?
Because of the complexity of the financial market’s interconnectedness, the ripples from market volatility will spread from WITHIN the Eurozone to OUTSIDE Eurozone through holders of EU assets.
Periphery to the core.
This implies that the spreading of losses on financial markets may lead to a liquidity crunch which may reverberate through the economic spectrum. So financial pressures will expand to include trade linkages. And there will be feedback loops from these.
And given the real time technology, the transition process as noted above may occur almost simultaneously.
Let us see how the global stocks reacted to the Greek default.
The Euro stoxx 50 sank 4.95% this week as shown above. Meanwhile, UK’s FTSE 100 dropped 2.49%, Germany’s DAX tanked 3.78% and French CAC 40 plummeted 4.96%. The Greek stock market was closed for the week following the imposition of capital controls and bank holiday.
Greece continues to play a game of chicken with the troika (EU, IMF and the ECB). Sunday’s referendum will determine whether or not Greece will accept the bailout offer with stringent tax and pension conditions imposed by the troika.
Correlation isn’t causation, but US stocks as measured by the SPX appears riding in tandem with the Stoxx 50.
Ironically, ex-Philippines ASEAN stocks rallied as shown by FTSE ASEAN 40 index.
Here is how the Greek crisis affected bonds of crisis affected nations on a week on week basis: Greek 10-year yields surged 317 bps to 14.01% (up 427bps y-t-d). Ten-year Portuguese yields jumped 19 bps to a 2015 high 2.91% (up 29bps). Italian 10-yr yields gained nine bps to 2.24% (up 35bps). Spain's 10-year yields rose 19 bps to 2.20% (up 59bps)[5].
Yet this perspective is from the Greece exposure alone. But what happens if markets become concerned NOT only on Greek exposure but on the heightened credit risks from the high levels of indebtedness of the Eurozone?
And think of this, if the troika accedes to Greece for a partial debt relief or to a debt restructuring, then what should stop the other heavily indebted nations from NOT asking the same terms from their creditors?
And if this should transpire, then what should stop the euro’s house of cards from disintegrating?
Does the mainstream see the magnitude of risks from such an event? Apparently not.
And even if the Greek votes ‘yes’ today, this doesn’t mean that the Greek crisis will end. Greece is insolvent. Another bailout will only extend and pretend Greece’s conditions. The bailout has been intended to protect EU’s government debts. And without having to institute real reforms, there will be no way for Greece to pay back their loans. For instances, increasing taxes will only reduce incentives for people to invest, and this will inspire more underground activities. The Greece crisis will only return.
And this is why the mainstream has been heavily relying on the ECB to expand her programs to create a firewall enough to prevent a contagion.
Yet the ECB isn’t invulnerable to a Greece default.
GoldMoney’s Alasdair Macleod has the numbers[6]: (bold mine)
The losses the ECB face from Greece alone are about twice its equity capital and reserves. The emergency liquidity assistance (ELA) owed by Greece to the ECB totals some €89bn, and the TARGET2 balance owed by the Bank of Greece to the other Eurozone central banks is a further €100.3bn, which at the end of the day is the ECB's liability. The total from these two liabilities on their own is roughly twice the ECB's equity and reserves, which total only €98.5bn. Given the likely collapse of the Greek banking system and the government's default on its debt, we can assume any collateral held against these loans, as well as any Greek bonds held by the ECB outright are more or less worthless.The ECB has two courses of action: either it continues to support Greece to avoid crystallising its own losses or it recapitalises itself with a call upon its shareholders. The former appears to have been ruled out by last weekend's events. For the latter a rights issue looks challenging to say the least, because not all the EU national central banks are in a position to contribute. Instead it is likely that some sort of qualifying perpetual bond will be issued for which there should be ready subscribers.How this is handled is crucial, because there is considerable danger to the ECB from the instability of the whole Eurozone banking system, which is highly geared and extremely vulnerable to any reassessment of sovereign credit risk. If you believe that the Greek crisis has no implications for Italy, Spain, Portugal and even France, you will rest easy. This surely is how the ECB would like to represent the situation. If on the other hand you suspect that the collapse of the Greek banking system, plus their sovereign default, together with a knock-on effect in derivative markets, have important implications for euro-denominated bond markets, you will probably run for the hills. The latter being the case, highly geared Eurozone banks are likely to face difficulties, and they will affect the ECB's own holdings of all bonds, both owned outright and held as collateral against loans to rickety banks.In short, the ECB's balance sheet, which is heavily dependent on Eurozone bond prices not collapsing, is itself extremely vulnerable to the knock-on effects from Greece. As the situation at the ECB becomes clear to financial markets, the euro's legitimacy as a currency may be questioned, given it is no more than an artificial construct in circulation for only thirteen years.
Greece represents just one of the many factors that can unglue the ECB and the euro.
And there is the regional political aspect. The Eurozone crisis, which has signified the unintended consequence on invisible transfers within the region, has been fueling anti-Euro nationalist sentiments expressed as emerging populist political groups such as the Spain’s left wing party the Podemos, Italy’s Five Star Movement, or even French far right the Front National led by “Madame Frexit” or Ms. Marine Le Pen. If anti-EU groups generate enough following to push for their nation’s exclusion then the whole EU project will be in peril.
And it’s not just the regional politics. There is the geopolitical component. A Grexit may prompt Greece into the fold of Russia-China network. This will expand the latter two’s sphere of influence, thereby creating additional tensions WITHIN the Eurozone. The potential reshaping or realignment of alliances may equally spell doom for the EU.
In short, EU’s crumbling economics has now spilled over or has percolated to as a buildup of political tensions within the region, as well as, with the world.
The bottom line is that the Greece Crisis signifies more of the butterfly effect of the Chaos Theory, where linkages which spans multiple spontaneous action-reaction responses from different stakeholders have been NON linear, and whose complexities won’t be captured by math models or statistics.
Thus, to simply write off the risks from a Grexit signifies just a ploy to maintain complacency and to blindness (from bubble worship) to what has been growing risks.
Listing at Philippine Online Job Markets Crashes in April and in May!
Last March, I wrote to one of the largest online jobs listing website, which has one of the largest holding sector firms as partner, to inquire why their job listing has dramatically shriveled from a range of 108k-115K in 4Q 2014 to 80-88K 1Q 2015 or a 25% quarter on quarter dive.
I asked if these have been because of tight competition or due to economic conditions or both. To my disappointment, citing classified or privileged information they declined to comment. Presently, their current listing ranges from 70k to 78K.
So what I did back then have been to commence on plotting, every Thursday, job numbers posted on another website since April. After the site upgrade, I included the above website on my tally sheet.
Apparently the advantage of competition is for information to get divulged even when others refuse to do so.
I recently talked about deteriorating headlines. Well last week, one of the domestic online job market providers declared that their listing of jobs has been crashing!
From the Inquirer (bold mine)[7]: ONLINE hiring activity in the Philippines remained on a decline as seen in May this year, when the number of hiring plunged by 43 percent compared to the same month in 2014, data from jobs listing site Monster.com showed. This was based on the results of the Monster Employment Index (MEI) Philippines, which showed a decline in hiring across all industries and occupation sectors… The MEI Philippines is a monthly gauge of online job posting activity, based on a real-time review of millions of employer job opportunities culled from a large representative selection of career websites and online job listings across Philippines. This index presents a snapshot of employers’ online recruitment activity nationwide. While the index does not reflect the trend of any one advertiser or source, it is considered an aggregate measure of the change in job listings across the industry. Monster.com said the business process outsourcing (BPO) sector saw the least decline of 2 percent in May compared to the previous year. The production/manufacturing, automotive and ancillary industries saw the steepest fall for the fourth time in a row with a 62-percent drop year on year. In terms of occupation, the lowest decline was seen in customer service-related jobs at only 5 percent, while the biggest decline of 54 percent was seen in jobs related to engineering, production, and real estate.
May’s 43% crash compounds on April’s 31% slump[8] (left window)! The other online job listing site shows of a 25% crash from mid-April to last week.
The public hardly appreciates the implications.
First, it means that there has been investment slack has been intensifying, which is why jobs have been falling on the first place.
Philippine jobs hail mostly been from labor intensive industries, this includes BPOs (which is why this has been outsourced to cheap labor nations).
The rapidly tanking job market has been an ongoing affair since November 2014. This aligns with my earlier observation where I wrote to other website for clarification.
Additionally, the job decline has been BROAD BASED. This now includes the sunshine industry, the BPO. Meanwhile, the striking collapse in the “production/manufacturing, automotive and ancillary industries” or in “jobs related to engineering, production, and real estate” should reflect on dwindling investments on key industries that powers the statistical GDP.
Second, declining jobs subsequently means LESSER income to support consumer spending. That 4Q job slump coincides with the surge in store vacancies in several shopping malls. There appears to be no recovery in consumer spending in 1Q 2015.
Third, with diminished consumer spending and investments, this means that the previous race to build bubble industries like hotels, shopping malls, vertical condos, housing and financial intermediation should translate to excess capacity or supply gluts.
This has been consistent with string of falling prices in a wide range activities in the real economy as seen in the government’s monitoring of prices in the wholesale industry, construction (wholesale and retail), manufacturing producer’s prices, and even in the slowing growth rate in May’s retail prices as announced by the Philippine Statistics Authority last week[9]. (see above)
Pieces of the jigsaw puzzle have been falling into place. And faltering prices and crashing jobs have been coherent with stumbling manufacturing activities and tumbling imports.
Those 10 months of 30++% money supply growth has come to home to roost or has come back to haunt the Philippine economy. (And this is why the panic over Greece?)
Fourth, given the growing slack in the real economy marked by excess capacity which has been mostly funded by debt, financial losses will mount as credit quality deteriorates.
The BSP reported[10] that banking loan growth continues to stagger in May where supply side loans increased by only 14.1% from 15.1% in April year on year.
Banking loan growth peaked in July 2014 and has steadily been on a downtrend through May. Yet banking loan growth has still been a substantial two digit growth rate. Given the substantial declines in supply side activities, just WHERE HAS ALL THESE MONEY BEEN FLOWING TO????
And these are supposed to be signs of financial stability?
The BSP also reported[11] that money supply growth edged higher by 9.3% in May from 9.0% in April.
Current money supply conditions are likely a manifestation of a bounce from a crash rather than from an upward recovery on consumer inflation.
Again, all the data above including the government’s measure of CPI AND bank loan growth trends including the FLATENNING YIELD CURVE have been conjointly POINTING at shrinking liquidity conditions regardless of what media and the establishment claims.
For them, prices have LITTLE or NO relevance to supply and demand. And yet they presume to talk economics.
Yet again given the still double digit rate of money supply growth where has all the money been going?
Fifth, the job numbers signify as additional evidence that there had been NO 4Q 2014 6.9% and 1Q 2015 5.2% GDP. Those numbers have been nothing more than a statistical pump mostly for political reasons: most likely to embellish the administration’s political capital especially going to the 2016 election where their interests will depend on the success of the appointed candidate, as well as, to add to financial windfall to the coffers of the oligopolies owned by oligarchs who will most likely be contributing to election financing.
The likely nominal 1Q GDP has been the consolidated revenue growth rate by PSE public listed firms at 1.6%.
Headline numbers are beginning to crumble. And this should begin to shake out one way trade conventional thinking.
Chinese Government Panics Over Crashing Stocks, Launches More Rescue Programs!
On the collapsing Chinese stock markets, last week I wrote[12],
Thus the Chinese government will likely move mountains to prevent a bear market from taking command. The Chinese government through her central bank, the People’s Bank of China (PBoC) may take a page out of Bank of Japan’s Abenomics to conduct direct (or indirect) stock market interventions via a QE. The Chinese government may also use reserves from State Administration of Foreign Exchange (SAFE) to intervene, as well as, order state owned enterprises to support stocks (whether in stealth or as mandate)
It appears that the aggressive interest rate cuts of the other week by the Chinese central bank, the PBOC, which had been touted to deliver a Greenspan paradigm rescue of the October 19, 1987 crash, failed to do the same wonders to the Chinese stock market.
The Shanghai Composite (SSEC) cratered a stunning 12.1% for the week, which followed two previous successive weeks of meltdown, in particular, 13.32% and 6.37% respectively. The three week crash has totaled an incredible loss of 31.76%.
Easy come, easy go.
While correlation isn’t causation, the horrid three week plunging Chinese stock market has coincided with a weakening US S&P 500.
I’m not here to give the implications which I wrote about last week, but to give some updates on what has been turning into a seismic episode.
Margin loans have been estimated at $354 billion at the start of the year, but this represents a little over half of the estimated $645 billion borrowed to speculate on stocks. (Reuters) I believe that there’s more. Yet present government actions as noted below will mean more debt that will be funneled to support the stock market.
The Chinese government can’t get enough of debt.
About 1.7 trillion yuan had been borrowed from shadow banks including online lending. Some even took 22% of margin loans to finance stock purchases (Bloomberg).
A typical stock market exposure funded by shadow banks has a leverage ratio of an astounding 10:1: “These products generate funds that are then used to finance individual and corporate stock market investors at ratios of up to 1:10, according to executives familiar with the businesses”. (Reuters)
A survey shows that about a third of university students have reportedly been playing stocks. The tradeoff from instant profits has been falling grades (Quartz)
On Wednesday July 1 crashing stocks has prompted the PBOC to inject 35 billion yuan ($5.6 billion) (Marketwatch)
On the same day, the Chinese government cut transaction fees by 30% and relaxed margin trading requirements which will “no longer require brokerages to force the sale of stock held by clients with insufficient collateral, and will allow “reasonable rollover” in margin trading”. The CRC allowed brokers to sell short term bonds to finance margin trades. (Bloomberg)
See more debt to prop up China’s crashing markets.
Crashing stocks have become increasingly political: “Some Chinese have taken to the Internet to lash out at the government's "stupidity" and ponder whether a stock crash might take the Communist Party down with it.” (Nikkei Asia)
Social stability issues will compound on the Chinese government’s dilemma. If they continue to support the stock market by drawing in greater fools financed by debt then this should imply future social upheaval or instability once all these interventions fail.
The Chinese government looks even more desperate.
Yet the hammer is about to fall.
Speaking of desperation, the Chinese government goes into a witch hunt.
The government have reportedly been looking for “clues of illegal manipulation across markets” and went “probing investors who used stock index futures to "short" the market - or bet on prices falling” and finally “suspended 19 accounts from short-selling for a month” (New York Times)
And the fishing expedition now includes foreigners as culprit to the crash.
The Washington Post exposes on the unfolding ANGER episode from the crash. (bold mine)
The latest weapon appears to be a good old-fashioned dose of nationalism, as opinion leaders took to social media to urge investors to hold onto shares for the glory of the Chinese nation. “Believe in my country,” Cao Zenghui, deputy general manager of Sina Weibo, whose company runs China’s main microblogging service and who personally has more than 100,000 followers, posting a national flag as his profile image. “It is not just a stock market issue any more. I will fight with forces who short China’s economy. No eggs can remain unbroken when the nest is upset.”..In the past few days, rumors have circulated on the Wechat messaging service that “international capital” — or simply capitalism itself — was attacking China. Goldman Sachs and the Hong Kong office of China Southern Asset Management were supposed to be profiting from short-selling the market – rumors that were later rubbished by the China Securities Regulatory Commission. On Thursday, Chinese media also implied that George Soros or Morgan Stanley might be to blame. Fan Shaoxuan, a senior executive at Weibo TV who has more than 12,000 followers on Sina Weibo, posted a photograph showing the slogans: “Hold stocks with confidence. Win glory for the country even if you lose the last penny.”
So to keep stocks from falling, the distressed Chinese government calls for everyone to bet the house (and farm) on the stock market. Real estate and all other assets have now become eligible for margin trades.
From Bloomberg (bold mine): Under new rules announced Wednesday by the country’s securities regulator, real estate has become an acceptable form of collateral for Chinese margin traders, who borrow money from securities firms to amplify their wagers on equities. That means if share prices fall enough, individual investors who pledge their homes could be at risk of losing them to a broker. While the rule change was intended to help revive confidence in China’s $7.3 trillion stock market, down almost 30 percent in less than three weeks, analysts say securities firms may be reluctant to follow through. Accepting real estate as collateral would tether brokerages to another troubled sector of the economy, adding to risk-management challenges as they try to navigate the world’s most-volatile stock market. “It does come across as relatively desperate,” said Wei Hou, an analyst at Sanford C. Bernstein & Co. in Hong Kong. “Globally, illiquid assets such as real estate are not accepted as collateral as they are very hard to liquidate.” The new guidelines also permit non-listed shares and “other assets” as collateral for margin traders who have insufficient value in their stock accounts to repay loans.
More and more resources to be exposed on the stock market bubble.
The weekend hiatus gave the Chinese government some space to think and adapt urgent new measures to support stocks this coming week.
The Chinese government announced that they will suspend all IPOs (10 from Shanghai and 18 from Shenzhen).
The Chinese government has also assembled the biggest brokers whom will support the market with a US$19.3 billion fund.
From the Bloomberg: The Securities Association of China said Saturday in a statement on its website that a group of 21 brokerage firms led by Citic Securities Co. will invest the equivalent of 15 percent of their net assets as of the end of June, or no less than 120 billion yuan ($19.3 billion) in total, to set up a stock-market fund. The fund will invest in exchange-traded funds of highly capitalized stocks, it said. The funds should be available by 11 a.m. on Monday, Caijing said in a separate report. In another development, top executives from 25 Chinese mutual funds, including China Asset Management Co. and E Fund Management Co., promised to “actively” buy stock funds and hold them for at least one year, according to a statement on Asset Management Association of China’s official website…
The people’s response? From the same article: The brokers’ fund to bolster equities may have only “a fleeting effect when daily turnover has reached 2 trillion yuan,” according to Hao Hong, China equity strategist at Bocom International Holdings Co. in Hong Kong. “This 120 billion yuan won’t last for an hour in this market,” Hong said by phone from Beijing Saturday. “It might benefit blue-chip stocks, as investors may see them as value, but the bursting of the bubble in small-cap/tech stocks is likely to continue.”
Brokers declare that they will withhold any attempts to sell: The brokers pledged not to reduce any proprietary investments in the equity market as long as the Shanghai Composite Index stays below 4,500, the association said. Listed brokers will actively buy back outstanding shares, while encouraging their parent companies to increase holdings, according to the statement.
So what happens if all fails, brokers will just take losses? Or will they break their vows?
Here is a tip to the Chinese government: They should import or hire for their services the Philippine version of the Plunge Protection Team or the index managers. The domestic index managers have been able to push the domestic benchmark to record highs even when half of the listed issues have been in bear markets.
I know the Shanghai Composite index has 1,000 firms against the 30 member Phisix, but who knows they may be able to contrive ways to prop up the index even if the rest goes down. The Philippine index managers may start with the Shenzhen Component index, an index of 40 stocks traded at the Shenzhen Stock Exchange, then work their way up.
Finally, the World Bank warned the Chinese government last week of the “distorted incentives and poor governance structures that have affected how financial resources are mobilised and allocated” (Financial Times)
Apparently all these stock market rescues/interventions/bailouts will compound on the distortions which should magnify the risks of her system’s fragility to an inevitable collapse.
Updated to add:
I forgot to mention that at the end of last week or June 29, the Chinese government said that it will "allow its basic endowment pension fund to invest in stock markets...The basic pension fund’s outstanding value was 3.59 trillion yuan ($578 billion) at the end of last year, the official Securities Times reported in May." (Bloomberg)
So the Chinese government has indeed taken a page out of Abenomics. Since a stock market crash would reduce asset values of such fund, the pensioners may eventually suffer from a cutback on their monthly welfare checks. That's if the pension fund will be used to support the stock market.
[1] Inquirer.net Greece crisis poses little threat to PH July 1, 2015
[2] Inquirer.net Remittances safe from Greece-induced volatility July 2, 2015
[3] Inquirer.net PH shielded from Greek default effects July 4, 2015
[4] See The Upcoming Boom In The Philippine Property Sector September 12, 2010
[5] Doug Noland Weekly Commentary: The Triad Credit Bubble Bulletin July 4, 2015
[6] Alasdair Macleod The euro crisis 29 June 2015 goldmoney.com
[7] Inquirer.net Online hiring falling across all industries July 2 2015
[8] April 2015 Index Highlights Monster Employment Index Philippines declines 31 Percent, on-the-year Monster.com
[9] Philippine Statistical Authority General Retail Price Index in the National Capital Region (2000=100) : May 2015 July 1, 2015
[10] Bangko Sentral ng Pilipinas Bank Lending Grew at a Slower Pace in May June 30, 2015
[11] Bangko Sentral ng Pilipinas Domestic Liquidity Growth Higher in May June 30, 2015
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