Chinese stock market crash; has the bubble finally burst?

[Monoriu]

And Singapore is a tiny island, while China is an enormous landmass encompassing tons of diverse territory, historical cultures and logistical challenges.

Given that the Chinese leadership don't want a western style liberal democracy, there aren't that many successful models to draw reference from.  The rich places on earth that aren't liberal democracies or oil-rich sparsely populated Muslim countries are Hong Kong and Singapore.  Hong Kong is high on civil liberties, low on voting rights, and government participation in the economy is minimal, whereas Singapore is the opposite.  In the eyes of the leadership, HK doesn't work.  The people are restless, the HK government sits on mountains of cash but won't spend it and lacks the political capital to do anything.  Singapore is Chinese, is ideologically close to the mainland Chinese way of interfering in the market, and the ruling party has successfully maintained power for over half a century while able to claim that it is a democracy. 

[The Minsky Moment]

There is a delicate ethnic situation in Singapore that decreases the incentives of the population to rock the boat; and there is a very large foreign component strongly biased to the status quo. 

Also Singapore has been very successful in reducing corruption.  Xi is supposedly following that playbook but so far it looks like his corruption drive is politically biased - and thus will ultimately fail.

[Monoriu]

There is a delicate ethnic situation in Singapore that decreases the incentives of the population to rock the boat; and there is a very large foreign component strongly biased to the status quo. 

Also Singapore has been very successful in reducing corruption.  Xi is supposedly following that playbook but so far it looks like his corruption drive is politically biased - and thus will ultimately fail.

All true.  But there is no acceptable model out there other than Singapore.  It is far from perfect, but it is the best.

[Valmy]

Far from being the best I am not even sure it is relevant to China's circumstances. The only thing that really recommends it to China is that it is also Chinese.

[jimmy olsen]

More signs of the coming storm.

http://www.thestar.com.my/Business/Business-News/2015/07/20/Manage-meddle-or-magnify-Chinas-corporate-debt-threat/?style=biz

Manage, meddle or magnify? China's US$16.1tril corporate debt threat
Monday, 20 July 2015
HONG KONG

Beijing may have averted a crisis in its stock markets with heavy-handed intervention, but the world's biggest corporate debt pile - US$16.1 trillion and rising - is a much greater threat to its slowing economy and will not be so easily managed.

Corporate China's debts, at 160 percent of GDP, are twice that of the United States, having sharply deteriorated in the past five years, a Thomson Reuters study of over 1,400 companies shows.

And the debt mountain is set to climb 77 percent to $28.8 trillion over the next five years, credit rating agency Standard & Poor's estimates. [ID:nL4N0ZV68I]

Beijing's policy interventions affecting corporate credit have so far been mostly designed to address a different goal - supporting economic growth, which is set to fall to a 25-year low this year.

It has cut interest rates four times since November, reduced the level of reserves banks must hold and removed limits on how much of their deposits they can lend.

Though it wants more of that credit going to smaller companies and innovative areas of the economy, such measures are blunt instruments.

    "When the credit taps are opened, risks rise that the money is going to 'problematic' companies or entities," said Louis Kuijs, RBS chief economist for Greater China.

     China's banks made 1.28 trillion yuan ($206 billion) in new loans in June, well up on May's 900.8 billion yuan.

The effect of policy easing has been to reduce short-term interest costs, so lending for stock speculation has boomed, but there is little evidence loans are being used for profitable investment in the real economy, where long-term borrowing costs remain high, and banks are reluctant to take risks.

Manufacturers' debts are increasingly dwarfing their profits. The Thomson Reuters study found that in 2010, materials companies' debts were 2.8 times their core profit. At end-2014 they were 5.3 times. For energy companies, indebtedness has risen from 1.1 to 4.4 times core profit. For industrials, from 2.5 to 4.2.

LOW RETURNS

Gao Hong, investor relationship principal at railway equipment maker Jinxi Axle Co <600495.SH>, which has seen its debt-to-core profit multiple triple to 10.25 between 2010 and 2014, said the company struggled to find profitable capital projects to invest in, so put money into short-term bank products that guaranteed returns.

     "The risk for these (capital) programmes is so high and the rate of return so low that we have to make the best decision for our investors (by) purchasing bank products. Last year, we made profits thanks to the sale of CNR shares," said Gao.

Much of the new lending is going to China's notoriously inefficient state-owned enterprises (SOEs) as part of the government's fiscal stimulus.

     "They are lending more to fund infrastructure projects, and some may be done by SOEs where leverage is increasing as a result," said Tao Wang, UBS head of China research.

     "Prices are declining and revenue is slowing, and in this environment you cannot force too quick a deleverage – that would lead to a hard landing," said Wang.

S&P expects China's companies to account for 40 percent of the world's new corporate lending in the period through 2019.

But quantity is not the only problem.

Getting credit to the most efficient companies, where it has the most impact on the economy, would be easier if inefficient companies were allowed to fail, so markets can price debt effectively.

Policymakers have said they want market mechanisms to play a bigger role in credit pricing, but in practice have baulked at the consequences, effectively bailing out companies in trouble, as it did last year when state-backed Shanghai Chaori Solar Energy Science and Technology Co Ltd <002506.SZ> defaulted on a bond coupon payment.

Rapid debt growth, opacity of risk and pricing and very high debt to GDP are a hazardous combination, Standard & Poor's says.

It took an unprecedented series of measures to arrest the plunge in China's stock markets, which are worth just over $8 trillion and are a minority pursuit for the relatively wealthy.

Tackling corporate debt might make that seem like child's play.

     "Managing the debt market is probably more dangerous than the stock market because the scale of the debt market is bigger, and without any high-profile default, the moral hazard is a significant issue," said David Cui, BofA Merrill Lynch analyst.

($1 = 6.2084 Chinese yuan renminbi)- Reuters

[jimmy olsen]

As expected, the government couldn't hold back gravity forever. The Shanghai exchange dropped 8.5% yesterday and is down another 1% today.

http://money.cnn.com/2015/07/27/investing/china-stock-market/

[Monoriu]

The Shanghai stock index is still considerably higher than before the market intervention.  I think it is still too early to say if the intervention is successful.

[MadImmortalMan]

One of those questions that will only really be answered in history books.

[The Minsky Moment]

Also the objective may not be to sustain stock prices indefinitely but to provide some breathing space for investors and brokers to close out positions and retrench back on margin.

[DGuller]

Also the objective may not be to sustain stock prices indefinitely but to provide some breathing space for investors and brokers to close out positions and retrench back on margin.

Which may not be such a contemptible position, in the short term anyway.  Such contagion is a type of destructive over-correction.  Of course, by saving market participants from contagions you're just predisposing yourself to more Misky moments in the future, but that's the risk of every market regulation for the sake of stability.

[Admiral Yi]

Also the objective may not be to sustain stock prices indefinitely but to provide some breathing space for investors and brokers to close out positions and retrench back on margin.

Regardless of the objective, the actors that were coerced into propping up the market are going to have a load of overvalued stock on their hands that they can only unload if the bubble continues.

[The Minsky Moment]

Also the objective may not be to sustain stock prices indefinitely but to provide some breathing space for investors and brokers to close out positions and retrench back on margin.

Of course, by saving market participants from contagions you're just predisposing yourself to more Misky moments in the future, but that's the risk of every market regulation for the sake of stability.

Yeah where have I heard that argument before?   

[jimmy olsen]

Shanghai market plunged 8.45%, even the PRC can't repeal the laws of economics.

http://www.bloomberg.com/news/articles/2015-08-24/chinese-stock-index-futures-tumble-after-last-week-s-retreat

China's stocks plunged, with the benchmark index erasing its gains for the year, as government support measures failed to allay investor concerns that a slowdown in the world's second-largest economy is deepening.

The Shanghai Composite Index sank 8 percent to 3,226.14 at 10:50 a.m. local time, dropping below the key 3,500 level that previously spurred state buying. The Hang Seng China Enterprises Index lost 5.3 percent. Taiwan's Taiex index slid as much as 7.5 percent in its biggest decline since 1990.

Worsening economic data and signs of capital outflows are undermining unprecedented government attempts to shore up the country's $6 trillion stock market. While China said over the weekend it will allow pension funds to buy shares for the first time, a speculated cut in bank reserve ratios failed to materialize.


"This is a real disaster and it seems nothing can stop it," Chen Gang, Shanghai-based chief investment officer at Heqitongyi Asset Management Co. "If we don't cut holdings ourselves, the fund faces risk of forced closure. Many newly started private funds suffered that recently. I hope we can survive."

More than 650 stocks fell by the daily 10 percent limit on the Shanghai Composite, including China Shenhua Energy Co. and China Shipbuilding Industry Co . The gauge has tumbled 37 percent from its June 12 peak to wipe out more than $4 trillion of value.

Economic growth slowed to 6.6 percent in July, according to Bloomberg's monthly GDP tracker. China's first major economic indicator for August signaled a further deterioration as a private manufacturing index fell to the lowest level in six years.

Stock Valuations

"China's economy is pretty ugly and some sectors have bubbles," said Wu Kan, a Shanghai-based fund manager at JK Life Insurance Co., who's keeping his holdings unchanged. "Selling pressure around global markets is also weighing on local sentiment. The Shanghai Composite may fall to around the 3,000-point level."

Stocks on mainland bourses traded at a median 61 times reported earnings on Friday, according to data compiled by Bloomberg. That's the most among the 10 largest markets and more than three times the 19 multiple for the Standard & Poor's 500 Index.

Yuan positions at the central bank and financial institutions fell by the most on record last month, a sign capital outflows have picked up. Chinese equity funds were the biggest contributors to more than $4 billion of outflows in Asia excluding Japan in the week to Aug. 19, EPFR Global said. Margin traders reduced holdings of shares purchased with borrowed money for a fourth day on Aug. 21.

Pension Funds

PetroChina Co., the nation's biggest company by market value, plummeted 8.4 percent. Industrial and Commercial Bank of China Ltd., the second largest, headed for its biggest loss since Jan. 19 with a 7.7 percent slump.

The State Council, or cabinet, on Sunday announced it will allow pension funds to invest as much as 30 percent of their total net assets in stocks. Pension funds had net assets of 3.5 trillion yuan ($547 billion) by the end of 2014, Xinhua News Agency reported.

The move is the latest attempt by the government to support the equity market, after arming a state agency with more than $400 billion, banning selling by major shareholders and telling state-owned companies to buy stocks.

"The news on pension funds over the weekend was positive, but not having the expected required-reserve ratio cut or any other larger measure seems to have disappointed investors," said Gerry Alfonso, a Shanghai-based trader at Shenwan Hongyuan Group Co. "But it is questionable whether even with one the market would have rebounded."

[DGuller]

Trying to keep the bubble inflated by letting pension funds prop it up?  I think American hegemony is safe for the near future.

[Josquius]

Isn't that the Japanese approach?