China moves to prevent a stock market crash

China’s stock market has been in a free fall since mid-June, even after recent government moves to prop up the market by easing margin trading rules for the benefit  of speculators in what has become China’s version of “casino capitalism,” the same gambler’s disease that caused the Wall Street crash in 2008.

CNN Money reports, China spends billions to prevent stock market crash:

YUAN-web-masterChina’s stock market is in trouble. It’s down over 20% since mid-June.

But Chinese stock brokers are trying to tell scared investors: Stop selling. Help is on the way.

On Saturday, China’s 21 largest brokerage firms said they would spend a whopping 120 billion yuan (about $19.3 billion) to try to stabilize the market, according to Chinese state media. The firms will actually buy stock funds themselves.

The goal is to show regular mom and pop investors that the big players still think buying stocks is a good idea. It’s a similar strategy to companies buying back their stock when they think it’s undervalued.

Big stock slide: The Shanghai Composite — the world’s third largest stock exchange if you add up the value of its companies — has lost 24% since June 12, putting it officially in bear market territory. The bears are growling even louder on the smaller Shenzhen Composite, down roughly 30% in the same period.

The brokerage firms argue that after the steep drop in many Chinese stocks, the shares now “offer a precious investment opportunity.”

The firms indicated they will keep buying as long as the Shanghai Composite Index is below 4,500. The index currently stands at just above 3,685.

Trouble ahead? China’s stock market has been on a wild ride in recent months. It shot way up and many Chinese investors jumped in, hoping to get rich quickly. While the stock market has tumbled in recent days, the Shanghai Composite is still up 14% this year — a better gain than America’s stock market.

Still, there are warning signs that more pain may be coming. According to Oxford Economics, shares may have to fall another 35% or so to bring them into line with long-term averages.

Business Insider adds, China’s stock markets are about to face a make-or-break week:

China’s stock markets may be facing a make-or-break week after officials rolled out an unprecedented series of steps at the weekend to prevent a full-blown stock market crash that could threaten the world’s second-largest economy.

The government is anxiously awaiting the market opening on Monday to see if the new measures will halt a 30% plunge in the last three weeks, or if panicky investors who borrowed heavily to speculate on stocks will continue to sell.

An online survey by fund distributor eastmoney.com over the weekend, which polled over 100,000 individuals, said investors believed stock indexes would rise over 5% on Monday. But many of those polled don’t think the bounce will last long.

“You’re going to need the central bank to open the floodgates to take us back to 4,500 points in Shanghai,” said an investment manager in Shanghai.

The Shanghai Composite Index was last at 4,500 on June 25, and it is now trading 22% lower.

the slide that began in mid-June, which the China Securities Regulatory Commission (CSRC) initially tried to downplay as a “healthy” correction after the fast run-up, has quickly shown signs of getting out of hand.

A surprise interest-rate cut by the central bank last week, relaxations in margin trading and other “stability measures” did little to calm investors, who sent shares down another 12% in the last week alone.

China’s top leaders, who are already struggling to avert a sharper economic slowdown, seem to be losing patience.

In the first of a series of announcements on Saturday, China’s top brokerages pledged that they would collectively buy at least 120 billion yuan ($19.3 billion) of shares to help steady the market, and would not sell holdings as long as the Shanghai Composite Index was below 4,500.

Later, the government also appeared to slam the brakes on the CSRC’s push to allow more companies to sell shares, which has threatened to dump even more supply on the market.

Twenty-eight companies that CSRC had approved to list shares all announced they had suspended their plans for initial public offerings (IPOs).

The U-turn is consistent with past IPO freezes in China when share markets were falling sharply, though they are usually spun as spontaneous company decisions, not as government directives.

* * *

Late on Sunday, China state-owned investment company Central Huijin said it had recently been buying exchange-traded funds and would continue to do so.

The combined effect of the policies is to signal to China’s army of retail investors, who conduct around 85% of share transactions, that the government is now standing behind the stock market. But it is unclear whether even this will be enough to put a floor under prices or revive the rally.

Li Feng, a trader at Fortune Securities, said the amount of money that brokerages and fund managers vowed to put into the stock market is tiny compared with the size of leveraged positions still waiting to be unwound.

Some analysts suggest total margin lending, both formal and informal, could add up to around 4 trillion yuan.

* * *

[M]any investors are just holding on long enough to cut their losses and leave the market.

People like Shao Qinglong, a public-service worker who has already lost over a quarter of his capital investing in stocks, told Reuters all he is waiting for is for the market to recover enough for him to break even.

“I didn’t sell at the peak because people all say the market will rise beyond 6,000 points,” Shao said. “I’m now waiting for the market to rebound so that I can get out.”

Finally, the New York Times reports, China’s Market Rout Is a Double Threat:

Screenshot from 2015-07-05 15:34:51For nearly three years, President Xi Jinping of China has crushed opposition by silencing and often locking up anyone who dares defy the government. But that aura of invincibility has been shaken by stock market speculators who have made a mockery of efforts to halt a steep slide in share prices.

The losses — Chinese shares have shed more than a quarter of their value in three weeks — pose an added risk, and possibly greater danger, to a global economy grappling with Greece’s difficulties in repaying foreign loans and its possible exit from the euro. About $2.7 trillion in value has evaporated since the Chinese stock market peaked on June 12. That is six times Greece’s entire foreign debt, or 11 years of Greece’s economic output.

Skeptical investors have so far shrugged off each step the government has taken to keep share prices aloft: an interest rate cut, threats to punish rumormongers, allowing the national pension fund to buy stocks and even plans to investigate short-sellers who have placed bets that the market will fall. The faltering of these measures has put an embarrassing dent in the halo of unruffled supremacy built up around Mr. Xi’s administration, and this weekend his government doubled down again, betting that it could beat bearish market sentiment into submission.

The government rolled out further initiatives in hopes of forestalling another market rout on Monday: 21 brokerages agreed on Saturday to set up a fund worth at least $19.4 billion to buy blue-chip stocks, and both of the country’s stock exchanges halted all new initial public offerings of shares.

On Sunday, the government brought in the central bank, the People’s Bank of China, and an investment arm of the country’s sovereign wealth fund to support the effort.

The China Securities Regulatory Commission, which governs the stock markets, said that the central bank would give financial support to the state-controlled China Securities Finance Corporation to “enhance its capacity to safeguard market stability.” The finance corporation lends to brokerage firms, which then lend the money to customers who want to buy shares.

In addition, China Central Huijin Investment, a company owned by the country’s sovereign wealth fund that usually invests in banks and other financial institutions, said on its website that it had recently bought into investment funds traded on the stock exchanges, and would continue to play a role in “market operations.”

* * *

The recent stock market losses are equal to three months of China’s economic output, which reached $10.3 trillion last year. Economists increasingly worry that the losses may lead to a sharp drop in spending by Chinese consumers who have lost much of their savings.

A plunge in consumer confidence could deliver a shock to a Chinese economy that is already slowing, as the real estate market has been struggling to cope with millions of new but empty apartments and as hundreds of thousands of export-oriented factories face tepid overseas demand. And with China now the world’s dominant market for commodities and the fastest-growing buyer of exports from manufacturing giants like Germany, the nosedive in China’s stock markets could hurt economic growth around the world.

“While turmoil in Greece has added to investor jitters of late, China’s stock market slide could prove ultimately more damaging for the global economy,” said Frederic Neumann, the co-head of Asian economic research at HSBC.

A plunge in consumer confidence could deliver a shock to a Chinese economy that is already slowing, as the real estate market has been struggling to cope with millions of new but empty apartments and as hundreds of thousands of export-oriented factories face tepid overseas demand. And with China now the world’s dominant market for commodities and the fastest-growing buyer of exports from manufacturing giants like Germany, the nosedive in China’s stock markets could hurt economic growth around the world.

“While turmoil in Greece has added to investor jitters of late, China’s stock market slide could prove ultimately more damaging for the global economy,” said Frederic Neumann, the co-head of Asian economic research at HSBC.

* * *

“There are significant forces who have their knives out for him and are waiting for him to fail,” Mr. Harding said.

The effects are already being felt in homes across China. Four-fifths of China’s stocks are owned by individual investors, a far higher proportion than in Western markets, where institutional investors predominate. Chinese investors have 112 million accounts on the Shanghai stock market and 142 million accounts on the Shenzhen stock market; about 20 million accounts have opened this spring on each exchange, as novices have rushed to join a national fever of speculation.

* * *

A ninefold increase in so-called margin lending by brokerage firms over the past two years helped fuel the rally. Many families borrowed money from banks, finance companies, neighbors and others to play the market. Loans were made at annual interest rates of as much as 20 percent, with borrowers allowed to put little of their own money into stock market investments.

That raises the question of how well China’s financial system can absorb another round of bad loans when it is already burdened with a huge amount of lending to state-owned enterprises and local governments that can barely meet monthly interest payments. Professor Shih, of the University of California, San Diego, estimated that total margin debt in China, including informal loans made by the off-balance-sheet operations of banks, could approach $1 trillion.

Making matters worse is that many owners of companies have financed expansion by borrowing from banks against the value of their shares. The terms of these loans typically demand that the owners post additional collateral if the shares come close to falling below the outstanding balance on the loan. That point is arriving for many companies, with the Shanghai stock market down 29 percent in three weeks, its sharpest drop since 1992.

The problem for millions of investors is that share prices may not recover for years, if ever, for the more speculative stocks. Only a third of the Shanghai stock market, and even less of the Shenzhen market, consists of shares in large businesses.

The rest of the shares are mostly in small and midsize businesses, often with weak balance sheets and endemic corporate governance problems. Such companies are vulnerable to looting by their controlling shareholders at the expense of minority shareholders.

* * *

Shirley Lin, a political economy professor at the Chinese University of Hong Kong who is a former Goldman Sachs partner, said that the stock market’s fall could have a profound effect on China’s economic policies and its pattern of economic growth in the months and years ahead. The government’s difficulties in controlling the fall are likely to make policy makers more hesitant about further financial liberalization, she said, and the stock market rout is likely to further stunt the expansion of small and midsize companies.

These nimble companies have been among the biggest contributors to economic growth in China. They have long struggled, with little success, to obtain loans from state-controlled banks and had been hoping to raise more money by selling shares instead. Now, those hopes seem to have been dashed.

“The first ones to go out of business will be the small and medium-sized businesses, and not the state-owned enterprises, which have not been contributing to China’s economic growth,” Ms. Lin said.

With both China and Greece teetering on the brink of economic crisis this week, get ready for what could be the start of a volatile period in the global economy.

One response to “China moves to prevent a stock market crash

  1. Thank you for posting these very informative blogs on the Greek and the Chinese economic problems. You have done an outstanding job of selecting concise, detailed and informative sources to describe what is happening. It is going to be interesting to see how these activities affect our own economy. Good job!