China’s Massive Xi Jinping Put: Apres Moi Le Deluge?

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:

The PBOC will backstop to the financing of brokerages in order to bid up stocks through China Securities Finance Corp.

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.

---

[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

China’s Stock Market Crisis: Stocks Stage Monster Rally as Government May Have Found the 'Secret Cure' to the Meltdown…

The troubled Shanghai index opened the day again under tremendous selling pressure.  The key index even stumbled to a low of 3,383 or a loss of 3.5% early session before staging an initial uneasy rally that ended the morning trade.

Following the Philippines index managers' afternoon delight pump, which involves manic panic buying after the lunch recess, the Shanghai index's rally picked up steam post lunch to close the day with a mammoth 5.76% rebound. 

Today’s gains, the biggest one day gain since 2009, according to Bloomberg, almost offset yesterday’s 5.9% crash.

The rally looked broad based as “about 600 stocks rose by the daily 10 percent limit on the benchmark index” notes the Bloomberg. All benchmarks posted substantial gains for the day.

Of course, there has practically been no day since the emergence of the crash where the government's hand have not been attempting to quash the panic.

And the likely secret to today’s success, as tweeted by SCMP’s George Chen 

The Bloomberg may haved picked this up: (bold mine)

Officials have unveiled market-boosting measures almost every night over the past two weeks to reverse the rout in the world’s second-largest stock market. Regulators late Wednesday banned major stockholders from selling stakes in listed companies, while announcing Thursday banks can roll over loans backed by shares. China’s public security bureau is also stepping in to investigate “malicious” shorting of stocks, the official Xinhua News Agency reported Thursday.

Yet despite the rally, the Bloomberg article adds that “another 1,439 companies were halted on mainland exchanges, locking sellers out of 50 percent of the market”

So China’s stock markets have become a buyers’ only market.

Hence the secret to containing bear markets, as unraveled by the Chinese government, has been to proscribe “selling” that have NOT conformed with the dictates of authorities. It is "price discovery" based on political ukase.

Bloomberg further notes that foreigners had been net sellers yesterday: Traders unloaded a record 112 billion yuan ($18 billion) of shares purchased with borrowed money on the Shanghai exchange Wednesday, the 13th straight day of declines. A five-fold surge in margin debt over the 12 months through June 12 had helped propel the Shanghai index to a more than 150 percent gain.

So the recent ruling to prohibit selling by shareowners, corporate executives and directors with holdings exceeding 5 percent transforms China’s stock markets into a roach motel—you can get in but cannot get out

Yet despite the recent crash, Chinese stocks remain very pricey. Again from Bloomberg: While the median price-to-earnings ratio in China has dropped to 53 from 108 at the height of the rally, valuations are more than twice as high as those on the Standard & Poor’s 500 Index.

Of course, the other way to look at is that this may have been an oversold dead cat bounce.

Yet pretty soon, China’s latest anti bear market paradigm may be embraced by political agents of other nations.

All of these measures constitute another form of capital control (financial repression). Yet capital controls have become a du jour global political tool: From Greece’s bank holidays (and ATM cash withdrawal limits) to China’s stock market sellers’ holiday.

 

How the Markets Responded to the Chinese Government's Adaption of 'Stock Market can be in Capitalism or Socialism'

The above quote is from SCMP's managing editor George Chen's Tweet.

The Chinese government sees the unfolding market crash as a problem of selling. So like always, the policy response has been knee jerk, in particular--to ban trading for half of listed issues that had been sold.

These headlines tell them all

From Bloomberg

From Business Insider

And because the policy response has been reactionary (something which I'll discuss someday), the result of which has been more of the same...

Amidst government support, the crash has only intensified.

And this time, it's not just China. But apparently crashing stocks has spread to Hong Kong too...

Hong Kong's Hang Seng Index (HSI) collapsed by about 8% intraday (right window) before recovering during session's end (perhaps due to interventions too) to close down by a staggering 5.84%.

But the profuse bleeding of Hong Kong's stocks has been broad based as seen above.

And this has began to diffuse into the region. Japan's Nikkei 225 sank by 3.14% and Taiwan's Taiex down 2.96%.

Will the rest of Asia be next? 

Or will Red Capitalism close the stock markets, once and for all, and hope that all the problems will just vanish?

Awesome Images of the Day: A Glimpse of China’s Stock Market Crisis

The following tweets are from South China Morning Post's Managing Editor for International Edition George Chen...

The tweet above looks like China's modern version of the early middle age King Canute, where the latter supposedly ordered the sea to turn back the tide.  

But unlike King Gnut or popularly known as King Canute, who did so in order to show the limits of his power, the Chinese version may be appealing to populist demand...

Chinese investors gamblers have been venting their rage as the boom turned into a three week stock market bust. 

One example of expression of the fury can be seen in the poster above.

And part of measures to stem the hemorrhage has been yesterday's new rule for a daily trading limit (image and article from the Business Insider)

Yet unfortunately, Chinese stocks performed against the wishes of China's political leadership.

But it didn't stop them from trying... 

The Chinese government easily learned the ways of the Philippine index managers via the 'afternoon delight' selective pump on several key heavyweight issues.

Unfortunately they haven't been as effective.

From as deep as 4.96% during the first half of the session as shown in the lower window below, losses have been reduced to just 1.29% at today's close. 

But as Mr. Chen tweeted above, 1,600+ stocks closed limit (10%) down!

And the broad market meltdown had been quite evident in most of China's benchmarks.

Financial Inclusion: The Greece Crisis Reveals that Not Even Safety Deposit Boxes Are Safe

Unfolding developments in Greece provides a great example of what happens with “financial inclusion” under an insolvent government: NOT EVEN SAFETY DEPOSIT BOXES ARE SAFE.

Writes Austrian economist Joe Salerno at the Mises Blog (Mises Blog)

Last week the Greek government imposed capital controls to prevent cash from escaping from the Greek banking system, which is on the brink of collapse.  These repressive financial measures, which were invented by "Hitler's banker" Hjalmar Schacht in the 1930s, include the closing of banks,  limiting cash withdrawals from ATMs to 60 euros ($67) per day, and the banning of all money transfers via credit and debit cards to accounts held in foreign countries. 

Despite these Draconian controls, Greek banks continue to hemorrhage cash and, after yesterday's referendum, it is probable that the daily limit on withdrawals from ATMs will be tightened.  Worse yet, the reeling Greek public suffered another shock yesterday when Deputy Finance Minister Nadia Valavani revealed to Greek television that the government and banks had already agreed that people would also not be allowed to withdraw cash from safe deposit boxes for as long as the controls were in place.  This may be part of a fallback plan if the ECB ends its bailout of the Greek banks.  The government with the banks' connivance would seize the cash euros stored in these boxes and compensate their lessees by crediting an equal sum of euros to their increasingly inaccessible checking deposits. The cash would then be fed into ATMs to postpone the day of reckoning for Greece's zombie fractional-reserve banks.  

In the meantime, the market has been working to provide a private, nonbank alternative for Greeks to safely store cash.  In Dublin, Ireland enterprising diamond dealer Seamus Fahy, who owns Merrion Vaults, is offering a 15% discount for Greeks who are able to evade the fascist capital controls and smuggle their cash out of the country.   As Fahy puts it: “If you lived in Athens, and had 200,000 euros, wouldn’t you try to get it out?”  In addition Fahy is considering opening a branch of Merrion Vaults in Athens. He is already advertising his services on Greek-Irish community web sites.  

In Greece itself, where business in many sectors has virtually come to a standstill, the sales of home safes are booming.  George Moschopoulos, who has been selling safes for 40 years, reports a fivefold increase in his business in the last five years compared to the years before the crisis.  Predictably, as Greeks have drained cash from their bank accounts since the financial crisis of 2008, home burglaries have skyrocketed.  In 2012, there were almost 88,000 cases of burglary, which was a 76 percent increase from five years earlier.   This year an elderly couple was robbed of their entire life savings of 80,000 euros.  

Of course these market alternatives for securing cash beyond the reach of corrupt governments, crony banks, and burglars hardly benefit those who have already been locked out by capital controls from withdrawing their property from safe deposits boxes.  As the Greek crisis deepens, the contagion threatens to spread to the sovereign debt and the fractional-reserve banking systems of other countries.  Faced with such a financial crisis, it is a good bet that no government will hesitate to impose capital controls, up to and  including forcibly preventing owners from accessing the contents of their safe deposit boxes.

Bankrupt governments will do all it can to seize resources from its constituents. Given that the banking system functions as the main depot of the economy's monetary resources, then the banking system will serve as the main channel for this.  As a quote widely attributed to American felon Willie Sutton, he robbed banks "because that's where the money is"

On the initial phase, government interventions will be benign. This will be through the imposition of taxes, fees, other surcharges and "persuading" clients to invest in securities of government and of their cronies. 

Then, the next phase will be through INDIRECT confiscations. Such will be channeled through monetary policies inflationism (Zero bound, or negative interest rates and QE) and war on cash (limits to cash transactions). 

And when the conditions becomes dire, appropriations will shift to DIRECT means: capital controls, deposit haircuts, and as the above, the expropriation of money stashed at the banking system's safety deposit boxes.

In paper, financial inclusion looks ideal (lower transaction costs, more efficient means to save and invest...blah blah) But in practice, it is all about government’s oversight and control of YOUR finances. 

Applying the analogy of Dr. Jekyll and Mr. Hyde, the other face of financial inclusion is financial repression.