China’s Government Launches Xi Jinping Put 2.0! How Strong Will Asia Be In the Face of a China epicenter Asian Crisis 2.0?

China’s Government Launches Xi Jinping Put 2.0! How Strong Will Asia Be In the Face of a China epicenter Asian Crisis 2.0?

The Xi Jinping Put is back!

From Reuters: China’s regulators lined up to rally market confidence on Friday with new rules, measures and words of comfort as shares brushed near four-year lows for the second straight day before surging. Vice Premier Liu He, who oversees the economy and the financial sector, supplemented regulators’ moves by saying the recent stock market slump “provides good investment opportunity” and that economic problems should be treated rationally… Earlier in the day, the securities regulator, central bank and banking and insurance regulator all pledged steps to bolster market sentiment as China reported its weakest pace of economic growth since the global financial crisis for the third quarter.

Figure 1

Last Friday, China’s main national equity benchmark, the Shanghai Composite (SSEC), opened the day’s session sharply lower (-1.25%) and had a short rally to almost close the deficit. The botched rally sent the index lurching back near the early morning lows.

By mid-morning, the rally found a second wind to send the index to neutral at the lunch break. When the afternoon session commenced, the index advanced mightily and never looked back.  In a wild roller-coaster session, the afternoon spike in theSSEC ended with a 2.58% advance, pruned the week’s losses to -2.17% (-22.88% year to date; -28.35% from January 24th high)

Unlike the Philippines where the bulk of price fixing manipulation comes with ‘tails’ at the closing bell, China’s National Team operates within the regular market session.

Intensive leveraging typically characterizes stock market bubbles. And the recent crash of the Chinese stock market exhibits such symptoms.

About 4.5 trillion yuan (US$648.6 billion), which amounts to an estimated 13 percent of the combined market capitalization of stocks on the Shanghai and Shenzhen exchanges, were pledged as collateral for loans, according to the South China Morning Post. In the face of falling share prices, creditors either demand additional collateral from debtors or were impelled to liquidate ‘pledged’ shares, thereby accelerating the stock market rout. China’s central bank, the People’s Bank of China (PBOC), assured the investing public that it would use various monetary tools such as re-lending and medium-term lending facilities to ease the liquidity crunch.

Liquidations based on collateral calls will most likely spread to the real economy. So based on path dependency, the proposed policy solutions to liquidity issues from systemic credit impairments by the PBOC is to extend more credit! Solve substance addiction by the provision of more of the same substance! Solve credit problems with more credit!

Liquidation has not just occurred in China’s stock market. China’s offshore yuan fell 2.1% this week and has been fast approaching its December 2016 USD-CNH high of 6.98!

When China’s stock market crashed in June 2015, the CNH was stable. In contrast, ongoing liquidations have now plagued both the CNH and the SSEC.

And more reports surfacing exposing China’s ‘skeleton in the closet’ debt in the real economy.

From the Financial Times: China could be facing a “debt iceberg with titanic credit risks” following a boom in infrastructure projects by local governments around the country, S&P Global has warned. Local governments may have accrued a debt pile hidden off their balance sheet as high as Rmb30tn to Rmb40tn ($4.3tn to $5.8tn) following “rampant” growth in borrowings, the rating agency estimated. The mounting debt in so-called local government financing vehicles, or LGFVs, hit an “alarming” 60 per cent of China’s gross domestic product at the end of last year and was expected to lead to increasing defaults at companies connected to regional authorities. The estimates come amid long-running concerns over debt levels in China, which has seen what some analysts regard as excessive bank lending in the wake of the financial crisis that has created unsustainable bubbles in property and other assets. (bold mine)

And the PBOC may have shifted its policies towards Hong Kong that might have caused liquidity squeezes (interest rate spikes) and sharp volatility in the USD-HKD last September. Of course, the FED’s policies had some influence too.

Figure 2

When China experienced a stock market crash in 2015, the Hong Kong stock market plunged too (-35% peak-to-trough). A short bout of volatility hounded the Hong Kong dollar in early 2016. Nevertheless, HIBOR rates were benign and unaffected by the events in the stock markets.

As an aside, as of Friday, the Hang Seng Index was down 14.6% year-to-date and down 22.9% from the record high in January 26.

Today, turmoil affects both Hong Kong and China.

In piecing together the current events, the PBOC’s whack-a-mole strategy hasn’t been working.  China's manifold bubbles have been in search of an outlet valve.  And the PBOC appears to have run out of tools to buy it time from a major eruption.

And further interventions to cosmetically boost asset prices will lead to more intense instability within its financial system.  And when the cracks spread and become too large contain, everything will unravel.

And here’s a symptom. From the Financial Times (October 16, 2018): A wave of protests by Chinese homeowners against falling property prices in several cities has raised fears of a downturn in the country’s real estate market, adding to pressure on Beijing to stimulate the economy. Homeowners in Shanghai and other large cities took to the streets this month to demand refunds on their homes after property developers cut prices on new properties to stimulate sales. In Shanghai, dozens of angry homeowners descended on the sales office of a complex that offered 25 per cent discounts to demand refunds, causing clashes that damaged the sales office, according to online reports that were quickly removed by censors. Similar protests have been reported in the large cities of Xiamen and Guiyang as well as several smaller cities. The property sector is estimated to account for 15 per cent of China’s gross domestic product, with the total rising closer to 30 per cent if related industries are included. A downturn would add to financial strains on China’s heavily indebted property developers which paid record sums for land during auctions last year but are now struggling to recoup their investment. Other evidence of a downturn is starting to emerge. Sales by floor area dropped 27 per cent year on year during the “golden week” national holiday earlier this month, a peak period for house buying in China, according to research house CRIC, which tracks 31 cities.

Just which of the region’s economies and financial markets will survive an Asian crisis 2.0 with the epicenter in China?

The coming crisis could make all other crises a walk in the park. Instead of one crisis, it may be a combination of multiple crises happening at once: 1997 (Asian crisis), 2000 (dotcom) 2007 (US crisis), 2011 (European debt crisis) and emerging market crisis.

 

Figure 3

Could this periphery to the core transmission serve as the nascent stage? (Pointer to Charlie Bilelio)