It was only yesterday that I pointed out that central banks ( Riksbank and the Bank of England) were starting to publicly admit to worries about Greece. The logic here is that some form of default would upset the world’s financial system via contagion effects. However something potentially much more systemically important is happening in the Far East to no fanfare and indeed not much attention. There have been many column inches devoted to the concept and possibility/probability of financial bubbles building in China but so far much fewer about the reality of one showing signs of bursting.
One sign of turmoil and official concern is action by regulators and my attention was drawn to this from earlier today. From the South China Morning Post.
the China Securities Regulatory Commission (CSRC) has set up a team to look at “clues of illegal manipulation across markets”.
Let us move to the China Daily which broke the news to us westerners at least.
The country’s securities watchdog announced late Thursday it will investigate suspected manipulation of the stock market as experts fail to explain worst collapse in years.
Zhang Xiaojun of the China Securities Regulatory Commission (CSRC), said the investigationwill focus on such activities occurring simultaneously in multiple markets. The CSRC has tracked irregularities between securities and futures trading.
The CSRC will transfer any criminal cases to the police, Zhang said.
Have you noticed that the regulator the CSRC only seems to have got interested when the equity market has had the “worst collapse in years”? The bubbilicious surge which preceded this decline never bothered it like this! Such behaviour concerns our suspicion that as far as equity markets are concerned the official view virtually everywhere is to sing along with Yazz.
The only way is up, baby
For you and me, baby
The only way is up
For you and me
A feature of such problems is the advent and then increase in the amount of margin trading – where trading is financed by borrowed money – which the CSRC implicitly confirmed earlier this week when it did this. From the South China Morning Post.
The CSRC has also relaxed rules on using borrowed money to speculate on stock markets, letting brokerages set their own tolerance level on margin calls and allowing the roll-over of margin lending contracts.
This may be behind the sharp rally on Tuesday although phases like this do experience sharp short-covering rallies which are known by the unpleasant phrase “dead cat bounces”. The more a market depends on borrowed money or margin trading the more likely these become as things become more tightly wired and vulnerable. Reuters puts it thus below.
Much of the selling of Chinese stocks has been driven by “margin calls”, when a brokerage that has extended credit to an investor to buy stocks demands more cash or collateral because prices have fallen.
The official attempts to stop this are looking increasingly desperate. From Bloomberg.
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.
So you can finance the equity bubble from the property bubble! What could go wrong?
I think that this from the South China Morning Post is rather extraordinary even for China.
Were foreign puppet-masters really behind the tanking Chinese stock market?
It echoes some imagery from the later Dune novels and there is more.
In a cartoon published on Tuesday by thepaper.cn, a state-owned digital media outlet that aims to engage with a young audience, an old Chinese woman is depicted as saying she wants to thank the government for helping to rescue the market. She also blames “foreign ghosts” for willing it to crash.
The cartoon immediately went viral on Weibo and WeChat, China’s two most popular social media networks.
Of course China would be far from the first country to make scapegoats of foreigners.
Actually the cause may be much nearer to home
On the lines of what goes up (especially at that rate) must come down I was interested to see this from J Capital Research in the Financial Times.
The sucking sound you hear is the average person’s bank account being drawn off into the hands of the red elite. Stay tuned, but maintain a safe distance.
Indeed the elites seem to have been behaving rather like the evil capitalist imperialists.
Ultimately, market participants all understand that the A-share bubble has been engineered to distract the average person from sinking values and illiquidity in the property markets. The pools of cash owned by Chinese people are regularly redirected to the asset classes that the government needs to rise and that elites are tapped into,
An interesting view of what is perceived to be capitalism but is really just another version of central planning.
Moving from the financial to the real economy
This is another market which has been affected by margin trading and we should not be surprised that it has been unsettled by events if we recall how big a player China is in it. From Reuters.
China uses more than a billion tonnes of iron ore a year to make steel – 14 times the consumption of the United States
That is an extraordinary number is it not? Well perhaps traders are mulling it now.
the price of the raw material fell by 5 percent.
Iron ore delivered to China .IO62-CNI=SI stood at $55.80 a tonne, its weakest since late April,
This gives us link to the real economy as we know that the overall trend for Iron Ore prices have put Iron Ore solidly into a bear market. There is an implication here for the underlying strength of the Chinese economy and also for the western end of the South China Territories (Australia).
Monetary policy hints at fears for the real economy
This situation is one where the Chinese economy is plainly showing signs of slowing and what it does not need is what is happening in its equity markets. We have seen a variety of easing moves by the People’s Bank of China in 2015 with the latest interest-rate cut coming as recently as last Saturday.
The problem is a familiar one to the Greek crisis and it is that when there are worries about solvency providing liquidity and lowering interest-rates help little. If you have to pay 1% per annum less it does not help a lot if you have investments which have just lost more than 20% over the past three weeks. The situation gets worse by an order of magnitude each time the investor has geared the position by borrowing funds.
On the surface it may seem that there is little to worry about here. After all the Chinese stock market has rallied strongly and indeed more than doubled since last summer. But the catch is that the ordinary or retail investor only tends to get in on the tail end of such moves and of course any margin trading is especially vulnerable to declines and bear markets. There will be cross currents from other struggling markets like Iron Ore for institutional traders and for the ordinary person from the troubles in the property market.
Accordingly as we stand right now it looks as though the Chinese elite did not learn much at all from the problems of the evil capitalist imperialists. If they also slam into a credit crunch then on a world scale it will have much more impact than what is happening in Greece.