DaBoyz have gone to town rectifying Wednesday’s selloff, goosing the E-Mini S&Ps 14 points above the regular-session close. The current E-Mini tout suggests this could only be for the purposes of distributing shares ahead of a presumptive next leg down, but if so, the tactic has become brazenly overdone. The only headline that could conceivably be driving the rally at this hour is that Shanghai stocks appear to have reversed their recent slide. If so, it would seem that Greece has not been the only thing on U.S. investors’ tiny brains lately. If they gave it a little more thought, they might understand how ominous it is that China has had to pull out all the stops to prevent a full-blown financial panic.
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Thanks for posting that WSJ piece. I am going to write an article shredding it to well deserved pieces. I’ll send the link when I publish it.
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Shred away, Mario, by all means. I’m curious myself about how you will address, for one, the tripling of margin debt over the last 12 months. RA
And when did you become a China expert? I’m just reminding you and everyone that it is an isolated “panic”, substantially detached from the real China economic situation. For example, headlines seem to imply that Chinese households have poured their cash into the stock market. This is nonsense. They are as a rule extremely conservative with their money. On average at most, a small percentage of their total cash would be placed in speculative positions including margin.
Shanghai stocks falling 30% in a month after going up parabolically 150% in a year is dynamically not the same as such a thing happening in the West. Thanks for not treating me as your default in the know China advisor. I’m only one of top recognized advisors in the Asia Pacific region asked to speak in front of very smart people. Silly me.
Cheers, Mario
I’m not trying to pass myself off as a China expert, but I know a bubble when I see one. Did you catch this opinion piece in Tuesday’s edition of The Wall Street Journal?
China’s Stock Plunge Is Scarier Than Greece
There are four basic signs of a bubble, and the Chinese stock market is on the extreme end of all four.
By Ruchir Sharma
July 7, 2015 7:23 p.m. ET
198 COMMENTS
China’s state-sponsored stock-market rally is unraveling, with potentially dangerous consequences. The first major sign that all wasn’t going according to script came on June 15. Chinese had awakened expecting big gains because it was President Xi Jinping’s birthday, but the Shanghai market fell more than 2%. One deeply indebted day trader committed suicide by jumping out a window, his net worth wiped out by the collapse of a single stock that he had borrowed heavily to purchase. The market has since fallen by another 25%—and some fear that prices could go much lower.
In most countries, no one thinks there is a link between a leader’s birthday and the market. That such a theory prevails in China reflects the widespread belief that Beijing’s authoritarian government can produce any economic outcome it wants. Now trust in China’s ability to command and control the economy is faltering. If trust collapses, the global repercussions could be more severe than those from the Greek debt crisis.
When China’s economy slowed following the 2008 global financial crisis, Beijing pumped massive amounts of liquidity into the system. First that money went into the property market, later into the various debt-related products sold through the shadow banking system. But when property slumped and the shadow banks started to pose systemic risks, China had only one major market left to flood—stocks.
Funneling some of China’s $20 trillion in savings into stocks was a last-ditch effort to revive flagging economic growth by giving the country’s debt-laden companies a new source of financing. The aim was to trigger a slow and steady bull run, but the somnolent stock market exploded into one of the biggest bubbles in history.
There are four basic signs of a bubble: prices disconnected from underlying economic fundamentals, high levels of debt for stock purchases, overtrading by retail investors, and exorbitant valuations. The Chinese stock market is at the extreme end on all four metrics, which is rare.
The sharp equity rally took place despite sputtering economic growth and shrinking profits. By official count, margin debt on the Chinese stock market has tripled since June 2014. As a share of tradable stocks, margin debt is now nearly 9%, the highest in any market in history. At the leading brokerages, 80% of margin finance has been going to retail investors, many of them new and inexperienced.
Today China’s 90 million retail investors outnumber the 88 million members of its Communist Party. Two thirds of new investors lack a high school diploma. In rural villages, farmers have set up mini stock exchanges, and some say they spend more time trading than working in the fields.
The signs of overtrading are hard to exaggerate. The total value of China’s stock market is still less than half that of the U.S. market, but the trading volume on many recent days has exceeded that of the rest of the world’s markets combined. Turnover is 10 times the level seen at the peak of the previous China bubble in 2007, and virtually the entire market inventory is changing hands every month. Such frantic activity has pushed up valuations for companies large and small, with the broad CSI 500 index trading at 50 times last year’s earnings and the Nasdaq -style board Chinext valued at 110 times last year’s earnings.
Since the June 12 peak, nearly $3 trillion in value has been erased, as Beijing takes increasingly desperate measures to arrest the price collapse. The authorities have cut interest rates and transaction fees. They have directed mutual funds and state pension funds to buy stocks. Over the weekend they panicked and reversed course by suspending new initial public offerings, suddenly choking off a source of the new corporate funding they had been trying to create. This comes when the real cost of corporate borrowing is high. Any further reduction in interest rates could accelerate the outflow of capital, after a record $300 billion has already left China this year.
The continuing crisis is viewed, locally and globally, as a test of China’s control over the economy. The “Beijing put”—a perception that Chinese economy and markets are backstopped by the government—is under threat. That perception has underpinned the widespread belief that Chinese growth won’t fall much below 7%, because that is the government’s desired target and Beijing is omnipotent.
Looming over all of this is China’s massive run-up in debt, which has increased by over $20 trillion—to around 300% of GDP—since the global financial crisis in 2008. All along, the bulls argued that Beijing has successfully managed every challenge to its three-decade economic boom, and that it could overcome the threat this debt represents. At a minimum, the argument went, China’s financial woes would be smaller than those of other countries with high levels of borrowing. This faith in Beijing encouraged many global hedge funds to pile into Chinese stocks.
But if Beijing can’t stop the market’s tumble, there could be a sudden shift in the perception of exactly how far economic growth might fall under the weight of too much debt. If that floor crumbles and the Chinese economy spirals downward, it will make the drama surrounding Greece feel like a sideshow. China has been the largest contributor to global growth this decade; Greece’s economy is about the size as that of Bangladesh or Vietnam.
There is no global drama that bears closer watching than Beijing’s battle for control.
Agree with you Rick. Even though I am a raw amateur, I do keep track of more than 100 stocks. Nearly all have crashed through major technical support that will become resistance and should halt today’s rally.
Don’t follow typically misdirecting headlines on anything China including the stock market Macau casino gyrations. Examination of what’s really going on beneath the attention grabbing headlines very unlikely indicates anything truly ominous.
Cheers, Mario
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I stand firmly behind my comments, Mario, and I don’t think my use of the word “ominous” has exaggerated the situation. Shanghai stocks fell 25% in a matter of days, and there is no doubting that this has sown seeds of a panic that will eventually — and I mean soon — germinate. Margin debt has tripled in the last year and farm towns have been setting up stock exchanges, even as GDP growth has fallen. RA