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)

Stock Market Cycle: Will “Three Strikes and You’re Out!” Determine the Fate of the PhiSYx?

Stock Market Cycle: Will “Three Strikes and You’re Out!” Determine the Fate of the PhiSYx?

In the 1990s, the last leg of the stock market cycle marked by the 6-year bull market, which began in 1991, saw three of its major trend line break in a year. It was the “three strikes and you’re out!” dynamic.

The violation of the third trend line laid the groundwork for a 19-month 68.09% collapse, pillared by the Asian Crisis. 

 

History may not repeat exactly but rhyme instead.

In this “final” leg of the secular bull market cycle that originated in 2009, there were three major trend lines which were rooted in 2009. While the first trend line was broken back in 2015, the transgression of the second and the latest fledging trend line occurred stunningly over the last 5 months. It may have signaled the modern-day variant of “three strikes and you’re out!”

 

Of course, the 1990s and today have distinct features. Today, brazen price fixing has massively deformed the price signals that have spurred monumental malinvestments in the deployment of capital. 

In desperation to rescue headline index, in three straight sessions, closing pumps were deployed equivalent to a stunning 1.6% of the last Friday's closing price!

The bigger the scale of price distortions, the more intense the accrued imbalances, thereby the more virulent the adjustments process

Or, the desecration of the laws of economics will have nasty and unpalatable consequences. 

 

  

“Three strikes and you’re out” may not only be the factor against the PSYEi/PhiSYx.

With today’s close, the PhiSYx priced in US dollars has pierced the January 2016 low today.

Prices do not emerge from a black hole.

With public and bank credit racing to historic heights in the face of rocketing rates, not only will the stock market be affected by violent adjustments to correct imbalances, but also the bubble sectors of the real economy.

Will “three strikes and you’re out” translate to the next transition of the boom-bust stock market cycle?

Attachments area

PhiSYx Surged 4.1% on Heavy Pumps and Dumps, Philippine Treasury Yields Spike Anew to Multi-Year Highs, China Launches Economic Rescue Package!

In this issue

PhiSYx Surged 4.1% on Heavy Pumps and Dumps, Philippine Treasury Yields Spike Anew to Multi-Year Highs, China Launches Economic Rescue Package!

-PhiSYx Soared 4.1% on Heavy Pumps and Dumps

-Market Share of Sy-Ayala Group Bulges to 51.83% of the PSYEi 30!

-The Making of the Chart Patterns, Treasury Yields Spike Anew to Multi-Year Highs

-External Risks: China Launched Massive Economic Rescue Package; Bank of Japan Fights Rising Yields and Plunging Facebook and Twitter Stocks

PhiSYx Surged 4.1% on Heavy Pumps and Dumps, Philippine Treasury Yields Spike Anew to Multi-Year Highs, China Launches Economic Rescue Package!

PhiSYx Soared 4.1% on Heavy Pumps and Dumps

This week’s 4.08% advance by the headline index, the PhiSYx, marks the second biggest since the first week of January 2017 (+5.96%). The frenzied advance of January 2017 highlighted the reversal of the bear market. Will this week’s advance resonate? Or will this be a bull trap?

Well, how was this accomplished? That’s the most significant question eluded by everyone.

 

Figure 1

And the answer has been provided by the above.

It is a week characterized by unfettered and flagrant pumps and dumps. In fact, July 25 recorded the biggest ever pump and dump!

On that day, following a frantic intraday pump, a stunning 97.22 points or 1.2% was shed from the end session dump! That day’s dump, possibly enraged the price fixers, that incited a panic buying, mostly on SM group of companies, to record a marvelous +2.02% gain in the next day or in Thursday, July 26. SM closed with 3.86%, BDO +1.85% and SMPH 3.31%. SM and BDO were major beneficiaries of marking the close pumps. The heavyweights of the Ayala Grop closed with lesser intensity: ALI +.86%, AC +1.66%, and BPI +.71%

And because losses may inspire a revival of selling, price fixers ensured that the Friday session would close in the positive, thus the relentless bid on market heavyweights to push the index 121 points up, 64 points or 52.9% from a mark the close pump.

Cumulative Pumps and Dumps for the week amounted to 259.54 points or a staggering 3.5% of the other week’s close!

Market Share of Sy-Ayala Group Bulges to 51.83% of the PSYEi 30!

Figure 2

SM contributed to a shocking 25% share of headline index’s astonishing advance. (topmost pane, Figure 2) Along with SMPH and BDO, gains of the SM group accounted for a 38.9% share of the forced inflation of the PhiSYx. Meanwhile, the Ayala heavyweights delivered 26.5% share of the gains in the headline index.

As a result from the SM-Ayala pumping, the top 5 issues have accounted for a record 45.85% share of the PhiSYX. Add BPI to the equation, a whopping 51.83% share of the index has been corralled by 6 companies. SIX companies make up the MAJORITY of the PSYEi 30!  

Thus, it would be a big mistake for anyone to see the index as representative of the 30 issues.

And as the years progressed, enabled and facilitated by the serial pumps, the market cap share of the index has accrued towards these companies, particularly on the SY group.

Such represents the monumental scale of mounting imbalances from the serial price fixing.

The Making of the Chart Patterns, Treasury Yields Spike Anew to Multi-Year Highs

Though this week’s average daily volume of Php 5.86 billion signified a 52.3% improvement from the January 2014 levels reached last week, it was about 19.5% lower compared to January 2017’s Php 7.28 billion. Price manipulations have been drained volume away from the general market.

Technically speaking, this week’s forced advance has powered the index above the broken secular trend lines of 2009 and 2012. Though at first glance this would look bullish, the damage from such trend violations has been critical and needs further less aggressive progress to be convincing. (bottom pane, figure 2)

And chart patterns depend on the spontaneity of the markets and not from the gaming of it.

And as I have repeatedly pointed out here, vertical price actions implies that Newton’s third law of motion (For every action, there is an equal and opposite reaction) will eventually take place, as it has in the past secular cycles.

Bear markets are merely symptoms of such a process. While interventions have managed to delay to the day of reckoning, it has caused imbalances to expand and accumulate only.

Of course, various interest groups want to see stock markets rise perpetually. The GSIS, for instance, bragged about a 69% jump in net income in 2017 mainly from stock market gains.

So the incentives to participate in price fixing may come from interest groups which depend on sustained inflation of the stock market.

Be reminded that the PhiSYx returned 25% in 2017 even when its aggregate net income grew by only 4.21% while market cap based net income grew by 8.43% only over the same period.

That is how detached the domestic stock market has been with reality.

 

Figure 3

And such orchestrated panic buying of index heavyweight stocks has taken place as local currency treasuries have been pummeled

LCY yields have skyrocketed to multi-year high levels on short to the middle curve. And rising yields/falling prices comes even as the BSP has been managing the bond markets. (figure 3)

These stock market pumps have emerged as if rising yields will have no impact on financing costs of heavily leveraged firms like SM and Ayalas, on aggregate demand and on competition for access to savings.

External Risks: China Launched Massive Economic Rescue Package; Bank of Japan Fights Rising Yields and Plunging Facebook and Twitter Stocks

And what’s even more striking has been ongoing pressures endured by our neighbors.

I have been saying here that China’s markets have been undergoing severe stress. [Asian Crisis 2.0 Watch: The Second Semester is Vulnerable To Crashes, The PhiSYx Syndrome, July 2, 2018]

The actions by the Chinese government last week have affirmed my view.

China’s State Council announced an enormous fiscal stimulus worth 1.35 trillion yuan (USD $199 billion) intended for infrastructure spending for local governments.

 

Figure 4

Meanwhile, to ease credit pressures and to encourage credit flows into small and medium enterprises, the PBoC injected 502 billion yuan (USD $73.9 billion) of cash into the banking system.

While interventions by the Chinese government helped spur a vigorous rally in risk assets throughout Asia, yields of benchmark10-year Japan Government Bonds (JGBs) spiked to the proximity of 1-year highs despite the aggressive interventions by Japan’s central bank, the Bank of Japan (BoJ).

It stands to reason that intensifying strains in the economy and the financial system have compelled the governments of China and Japan to undertake rescue packages which stock markets have bet that these measures would work.

What if they won’t? What if the imbalances have reached a critical mass from which stimulus would do little to alleviate such pressures from finding an outlet valve?

The Shanghai Composite closed by up by only 1.57%, following 2-days of pullback. The stimulus incited a substantial rally in Chinese equities, but it appears that the upside momentum may have lost steam.  

And the stimulus aggravated only the yuan’s decline. The USD dollar CNY charged to a one year high.

Across the Pacific Ocean, plunging stocks of technology mainstays of Facebook and Twitter which had been primary drivers or anchors of the recent record rally may also presage the surfacing of risks. Facebook, Amazon, Netflix, Google and Applecomprise 10.6% share of the S&P 500, while the S&P technology index accounts for 23%.

At the end of the day, risks won’t be wished away by the manipulation of markets.

Let me close with a quote from a recent speech by BSP Chief Nestor A Espenilla, Jr

In the BSP, we affirm that good governance is not just about compliance with laws and regulations.  Rather, good governance must frame and ground our intent so that our actions, initiatives and policies add value.  Good governance results in breakthroughs in the effective delivery of our mandates of maintaining price stability, financial stability and an efficient and safe payments system.

Pls. go back and look at figure 1.

Does the BSP think that the tolerance of market manipulations represents ‘good governance’ that ‘may add value’ and enhance or ‘maintain financial and price stability’?

Nestor A Espenilla, Jr: Good governance in the pursuit of mandates BIS July 17, 2018