China

Stock Markets in China Collapsing—Government Can't Blame Anyone

Shanghai Composite down nearly 30 percent from a June high.

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Bloomberg

The stock market in China is collapsing—the Shanghai Composite Index finished down 5.9 percent yesterday, and the Hang Deng Index, based in Hong Kong, finished down 5.84 percent.  

And it's not a one day thing. The Shanghai Composite is at 3,507, down from a high of 5,166 on June 12. In the last three weeks, the Chinese government has cut interest rates, compelled nominally private brokerage firms to commit to buying billions of dollars in stocks, and promised more stabilization measures in an effort to restore confidence and arrest the slide. Many stocks yesterday dropped 10 percent in value—the maximum allowed before regulators suspend trading on those stocks. Last November, when the Chinese market was opened up, in a limited fashion, to outside investors, the Shanghai Composite was lamented as "virtually flat." By April of this year, a six month rise had led to worry about a bubble being formed. In May, Morgan Stanley noted concern over valuation in China's stock markets, downgrading it from Overweight to Equal Weight.

Chinese investors tend to be highly leveraged, meaning they borrow against their assets to purchase stocks,  which aggravates the panic sentiment, leading to yet more sell-offs. There are more than 90 million investors in China—it's less than 10 percent of the 1 billion-plus population but more than the rolls of the Chinese Communist Party, which numbers 82.6 million. China's commercial banks are anything but, serving largely as tools of the state. And while the Communist Party said it was making reform of state-owned-enterprises a top priority, and last year permitted the opening of a few privately-financed banks, it's the state apparatus the government will rely on now to stem losses.

China's rising middle class has helped the Communist Party survive and thrive because times appeared to be good. The Chinese government has consistently cracked down on dissent, and no formal opposition party to the government exists. It makes China the envy of authoritarian-minded commentators like The New York Times' Thomas Friedman, who argues China is better governed than the U.S., because of that lack of opposition and the gridlock that comes with it. Layer upon layer of regulations helped cause the 2008 financial crisis in the U.S., but opposition to regulations helped the ruling party perpetuate the myth that deregulation caused the crisis. The Chinese government, on the other hand, will be hard pressed to find anyone to blame but itself.

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  1. We were talking about this at a family dinner last night. My wife’s father (from Guanzhou) don’t understand why the gov’t doesn’t just declare the market closed and mandate that it not reopen until people stop selling. That’s what being raised in Maoist China does for you. Her mother, raised in British HK, has no such delusions.

      1. China Bans Liquidity and Exacerbates Problems for Major Shareholders

        1. China turns a problem into a disaster.

          1. They’re going to fail, because they’ll react to this shit like Maoists instead of Taoists.

            1. Nice. 😀

    1. My wife’s parents were raised in Maoist China, but seem to have a good grasp of markets and freedom in general. They are not fans of the Marxist-in-Chief, to say the least.

    2. In fairness to your inlaws, a very large number of Americans, especially those on the left would give the exact same answer.

      1. Ach, that’s true, I didn’t think of that. How very sad. Capitalism is a failure unless it promises unlimited growth and material abundance for everyone at all times in ever-increasing amounts. Anything less, and it just proves the need for socialism.

        1. “Capitalism is a failure unless it promises unlimited growth and material abundance for everyone at all times in ever-increasing amounts.”

          You forgot to add that it also can’t make the wealthy wealthier faster than the poor because ERMAHGERD IRNCOME INERQUERLITY!

    1. yes. because when I think of china I think of capitalism.

      If this was huffpo I bet a lot of people would be making that comment and MEAN IT!

    2. NEVER FORGET.

      One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power. China’s leaders understand that in a world of exploding populations and rising emerging-market middle classes, demand for clean power and energy efficiency is going to soar. Beijing wants to make sure that it owns that industry and is ordering the policies to do that, including boosting gasoline prices, from the top down.

      1. I knew that was Friedman after the first sentence.

        1. Feeding people feet-first into a woodchipper is generally a bad idea, but….

          1. People, sure, but Friedman fails the Turing test.

          2. I could make a comment about certain unnamed individuals being so hard-headed as to break a woodchipper, hence requiring feet-first entry. However, that would be wrong, and bad, and evil, and…and…and.

            Note: The above statement in no way endorses the feeding of people into woodchippers, even idiots.

        2. It sounds like Oswald Mosley to me.

  2. The Chinese government, on the other hand, will be hard pressed to find anyone to blame but itself.

    I’m sure they’ll find someone else to blame, and they won’t even have to work hard at it.

    1. I hear kulaks and wreckers have been spotted.

    2. A certain number of replaceable bureaucrats will disappear, their families eventually receiving a bill for the bullet.

    3. Rednecks waving the Confederate flag must have done it.

    4. “I’m sure they’ll find someone else to blame, and they won’t even have to work hard at it.”

      The Germans and the banksters! Greece has already done the heavy lifting.

    5. NOW do you see what gay marriage has wrought?

      1. What is not unforeseen is not unintended.

  3. Any thoughts on the effects for Hong Kong and Macau?

    1. They’ll be elated. Native Hong Kong’ers despise the mainlanders for swarming down and going on spending sprees that they believe are driving up the prices of everything. They refer to mainlanders as “locusts”. A lot of them will gladly take some short-term pain in their own stock index if it means fewer rich Mandarin speakers coming down and ruining their city*.

      *I’m not affirming or denying these allegations, just repeating what my mother-in-law constantly says, and a common refrain I heard while in HK.

      1. Any drop in consumer prices will be followed by a drop in wages and profits, so it seems like the well off will “gladly” have the not so well off take a hit.

  4. Is it time to buy yet?

    1. I would think that after the state-imposed halt is lifted there will be another massive selloff. Then after that it will be time to buy.

    2. Is it time to buy yet?

      I’m sure Dave Weigel Painful Rectal Obstruction would say so!

      Because “free” markets…..

  5. Here’s the harsh, plain truth: virtually the entire global economy is now a giant, fragile structure of debt, easy money, overleverage, and shady-ass credit default swap arrangements.

    When the whole rotten edifice eventually comes crashing down for good, “ugly” won’t even begin to describe the fallout.

    1. Here’s the other harsh, plain truth: the vast majority of the world’s populace are completely innocent of this state of affairs.

      It’s central banks and central governments who are guilty. The former is either a direct handmaiden of a corrupt, desperate and broke government (see, Japan) or has the unmitigated gall to champion its insulation from the populace and rule without consent as its virtue (see, the Federal Reserve Bank of the United States).

      I do not call myself a “citizen,” I call myself a captive. “My” government doesn’t have my consent to govern me. It’s the same on most of the globe: be honest, be good, dissent, be killed off.

      China will set off 2008 2.0 under very bad prevailing conditions. Like you said, “ugly” doesn’t even come close to describing it.

      1. the vast majority of the world’s populace are completely innocent of this state of affairs.

        I wonder who keeps voting these fiat money fuckheads, promising everyone free ponies, into office?

        Yes, I realize that a serious portion of the world has no say in who leads them, but not all of them.

        1. When was the last time you got to vote for Chairman of the Federal Reserve or the regional fed presidents that make up the FOMC?

          Yet, without any political permission, consultation or notice the Federal Reserve can create new money and use it to buy real assets, set off horrendous inflation (which yes we do have bad inflation in everything they touch, housing, federal student loans, food, energy), devalue your savings, destroy your economy.

          I have never in my life had the opportunity to affect this ‘system.’ I was born into it and into its existing corruption and dysfunction. I’m a captive. Not everyone in Japan voted for Abe, etc.

          Look at Greece. Once the beast is in place, they can just fire your popularly elected, popularly supported Finance Minister. Democracy is dead as long as the vampire squid lives.

          1. When was the last time you got to vote for Chairman of the Federal Reserve or the regional fed presidents that make up the FOMC?

            ‘We’ vote for pols that support the continued existence of the central bank and appoint its board members. The US gubmint is one that the US public deserves in spades.

            I’m stuck with it as well and I never voted for any of these fuckers.

            1. Why do you imagine that the “citizens” of any other country are any differently situated than you or I are; i.e. not consenting, not represented, captives and victims of economic and political tyranny?

              Arrogant, corrupt, greedy unelected persons are economically destroying every major and minor country in the world.

              No, I do not deserve the government I have. Not at all.

              The QE that has warped and fucked this country was and is purely and simply illegal; maintaining a ZIRP policy while prices go INSANE is not within the dual mandate of the Fed. Their unconventional monetary policy was and is illegal under even the odious Federal Reserve Act. The Fed buying direct from the US Treasury is not legal; bid-rigging an auction with 23 primary dealer banks is not a purchase from the “open market.”

              The whole world followed suit and now you get a front row seat to a synchronized, global stock market implosion followed by every other interconnected debt sewing war and chaos and poverty and tyranny.

  6. Ed hasn’t met very many progressives, obviously.

    They can ALWAYS find somone (a capitalist) or something (captialism) to blame.

  7. Its almost like highly centralized and controlled economies all hit a wall and either stagnate (Japan) or collapse (China?).

    Weird. Must need different Top Men.

    When the whole rotten edifice eventually comes crashing down for good,

    Here’s the thing about leverage: it always contracts at some point.

    Here’s the thing about the modern credit market: its highly interrelated and interdependent, because of the derivatives. Most major debt pools support derivatives, which are themselves highly leveraged. Derivatives are a way of “hedging” (read: spreading the risk of) debt. So, when any major debt pool (Greek/Euro debt, Chinese hedges, US mortgages, etc.) fails, the derivatives spread that failure beyond the holders of the debt.

    The only real questions are: (1) Which pending debt failure will spawn a worldwide credit collapse via derivatives? and (2) When?

    The world is probably more leverage now than it was before the ’07-’08 collapse. The central banks have no tool left in the tool box (other than increasing the rate of monetization of debt) to mitigate a credit collapse.

    I don’t see any way we don’t have a credit collapse in the near future. And I don’t see any way it won’t be worse than the last one, a mere 7 years ago.

    1. They have always and will always collapse if for no other reason than people cannot help but favor their friends over what is profitable. So they always end up being a giant scam where unprofitable businesses are propped up at the expense of profitable ones.

    2. I think we’re headed towards a global depression when it all goes down. The question is whether we will continue to be somewhat shielded as the last horse in line at the glue factory or not. We may be OK since people will still need somewhere to put their money and the US may be the only, albeit shitty, option.

    3. Yeah, but cranks like you have been saying the next big one is around the corner since 2009. At some point there will be a massive correction, but sitting on a pile of cash waiting for it to come has never been the right move.

      1. This post masterfully slays an argument that was never made.

        1. I’d only add that sitting on a certain amount of cash and waiting for a correction has often been the right move.

          1. ..or sitting on a big pile of gold (purchased at $300/oz.) and waiting for a correction has often been the right move; even if it is a bit tough on the hemorrhoids.

      2. At some point there will be a massive correction, but sitting on a pile of cash waiting for it to come has never been the right move.

        Yep….! Until it is the right move.

      3. The only way to win is not to play…?

    4. “Here’s the thing about leverage: it always contracts at some point.”

      Yeah, the Credit Cycle is a fundamental observation.

      https://en.wikipedia.org/wiki/Credit_cycle

  8. Anyone care to hazard a guess as to whether this is just an overheated stock market correcting violently, or a sign of deeper economic problems in China? I tend to lean toward the latter, but I am no expert on China.

    Just seems ominous that their government is taking such radical steps to prop up stock prices. What are they scared of?

    1. I think it’s both.

      But no one’s going to let this crisis go to waste.

      We’ll blame crony capitalism.

      The CCP will launch an anti-corruption campaign, etc.

      The environmentalist will blame pollution.

      The Scientologists will blame psychology.

      1. Shrike blames Ronald Reagan.

        1. Shrike blames Ronald Reagan.

          ….and I blame you Ken….for all this fear mongering surround the use of the word “kunt”!

    2. Even if it was the former, the Chinese government’s policies will turn it into the latter.

      1. I don’t know. I see this as a way to devalue their currency without getting blamed for meddling.

        1. They’ve banned major shareholders from selling for the next six months. So its now basically impossible for this to be a short correction since people won’t be able to liquidate bad investments or payoff the massive debts they took on to buy the stocks in the first place. If that’s their first best idea, I’d hate to see what they got in the bullpen.

          1. 1929 anyone?

  9. “China’s rising middle class has helped the Communist Party survive and thrive because times appeared to be good.”

    “Appeared to be good”?

    Time have been good, and middle class in China isn’t necessarily what we think of as middle class in the United States.

    Meanwhile, China’s experiment with more capitalism really just started 14 years ago when they joined the WTO and plugged their gigantic labor force into the world economy. Since then, hundreds of millions of Chinese people have pulled themselves out of peasant level subsistence farming and into what they consider the middle class.

    Let’s not fall into the progressive trap of saying every drop in the stock market proves that capitalism doesn’t work. No, China’s isn’t really a free market capitalist economy, but a little bit of capitalism goes a long way. And even if there were no interference from the government, the stock market would drop every once in a while–as people reallocate their misinvestments. This is part of the process of how economies correct and grow.

    P.S. Any particular recession doesn’t prove that capitalism is a failure either–or that crony capitalism is to blame either. The future is uncertain, and we would have recessions in Libertopia, too–they just wouldn’t be as deep and they wouldn’t last as long.

  10. “The Chinese government NPR, on the other hand, will be hard pressed to find anyone to blame but itself BOOOOOOOOOOOOOOOOOOSH!!!111!!!!!!!1!1!!!.”

    1. Duqu 2.0 malicious worm attack?

      1. More likely Chinese government hackers attempting to slow global trading on any and all Chinese firms.

        1. Interesting thought…. I guess I could not dismiss that out of hand.

          1. *mails matching tin-foil hat to Swiss*

  11. Bright side, Chinese products are probably going to get cheaper.

    1. The price of oil has dropped about 15% over the past few days.

      It’s not just products, it’s the commodities.

      1. Absolutely, the oil industry is scared shitless and rightly so. I expect we’ll see some major bankruptcies in Texas and North Dakota soon.

  12. Stocks halting in China and on the NYSE????

    Something smells off here.

    1. It’ll be back up in six months when the panic has settled.
      Move along peasant.

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