China’s mind-boggling economic crisis

We’ve spoken recently about the economic crisis in China (follow those four links for more information).  Don’t believe reports that it’s getting better.  What you’re seeing is a massive, central-government-controlled push to force discipline upon the markets by command authority, ignoring the economic reality that underpins them.  It’s a frightening picture.

Just look at how the Chinese government intervened in its stock markets.  Talk about dictatorial!  Caixin Online (an authoritative source about the Chinese economy) reports:

Top executives from 21 securities firms spent the morning of Saturday July 4 pinned to government office chairs while the future of China’s stock markets hung in the balance.

They’d been summoned on a day off to the Beijing office of the China Securities Regulatory Commission (CSRC) for talks aimed at pulling the Shanghai and Shenzhen stock exchanges out of a three-week tailspin.

. . .

A person who attended the meeting but asked not to be named said the securities firms’ executives were told what to do – and that there would be no room for negotiating with regulators.

After the sit-down, the firms announced in a joint statement that to stabilize the stock market they would spend at least 120 billion yuan combined to buy exchange-traded funds linked to blue-chip stocks listed on the Shenzhen and Shanghai bourses. Moreover, the firms pledged to hold all stock that had been bought with their own money until the index reached at least 4,500 points.

The CSRC ordered the firms to hand over that 120 billion yuan to the China Securities Finance Corp. (CSF), a four-year-old agency co-founded by the country’s major securities and commodity exchanges and clearinghouse to finance brokerage firms’ margin trading and short-selling business, the person said. They were told the money would be used for stock purchases.

. . .

Then on July 8, as part of the CSRC strategy, the CSF said it would set aside 260 billion yuan to finance stock purchases by the 21 securities firms.

The Chinese government’s stock market rescue campaign was under way, but far from over.

. . .

Money used by the CSF to buy shares included the 120 billion yuan handed over by 21 securities firms on July 6, those sources said. The agency also borrowed from the central bank and commercial banks. In a statement released on July 8, the central bank promised to support the CSF with adequate liquidity.

More intervention ensued. The Ministry of Finance promised not to sell any holdings in listed firms, and SASAC ordered SOEs to hold on to all their stock. Then the insurance regulator loosened rules governing investing by insurance firm by raising the percentage of premiums they can use to buy stock.

The CSRC even bent the Securities Law and its own rules by encouraging a company’s major shareholders, directors and senior executives to buy the firm’s shares under circumstances where the regulations say they should be punished. It also imposed a six-month ban on stock sales by them.

Meanwhile, 1,442 companies had exercised their right to suspend trading of their own stock on the Shanghai and Shenzhen exchanges as of July 9. Many of these companies, which are among the 2,781 listed on the bourses, had seen their share prices fall sharply in the previous weeks.

. . .

Regulators also clamped down on futures trading and started looking for illegal short-sellers. The CSRC and police announced a hunt for what they called “malicious” short-sellers. But as of mid-July, none had been identified.

. . .

Critics of the CFFE clampdown said the agency actually put more pressure on the stock market because some investors deprived of access to index futures during the Shanghai slump decided to simply dump their holdings.

“I wanted to short (index futures), but the tools were not working,” said a securities firm trader who did not want to be named. “I had to sell all of the stock.”

The trader said he was not alone. “Everyone was paranoid and rushing to protect themselves,” he said.

. . .

Added an investment banker who did not want his name printed: “Market reform will never be successful if the government resorts to intervention at every a crucial moment.”

There’s much more at the link.

Can you imagine the uproar, the outcry, if the US government, through the Securities and Exchange Commission, ordered this country’s top stockbrokers and banks to simply hand over more than $19 billion, just like that?  Yet that’s what the Chinese government did . . . and its financial institutions complied.  Additional government funds were added to that amount – a lot more.  Bloomberg estimates that China has allocated no less than US $483 billion to turn its stock markets around.

China has created what amounts to a state-run margin trader with $483 billion of firepower, its latest effort to end a stock-market rout that threatens to drag down economic growth and erode confidence in President Xi Jinping’s government.

China Securities Finance Corp. can access as much as 3 trillion yuan of borrowed funds from sources including the central bank and commercial lenders, according to people familiar with the matter. The money may be used to buy shares and provide liquidity to brokerages, the people said, asking not to be named because the information wasn’t public.

While it’s unclear how much CSF will ultimately deploy into China’s $6.6 trillion equity market, the financing is up to 25 times bigger than the support fund started by Chinese brokerages earlier this month. That’s probably enough to restore confidence among China’s 90 million individual investors, says Bocom International Holdings Co. The Shanghai Composite Index jumped 3.5 percent on Friday, capping a two-week rally that’s turned it into one of the world’s best-performing equity gauges.

“It doesn’t have to use up all the money, as long as it can make the rest of the market believe that it has enough ammunition,” said Hao Hong, a China strategist at Bocom International in Hong Kong. “It is a game of chicken. For now, it seems to be working.”

Again, more at the link.

That’s why you can’t believe stories of a ‘turnaround’ or a ‘recovery’ in China.  The situation is being micromanaged by government bureaucrats who have no idea what they’re doing.  They’re throwing money and regulations at the problem, rather than trying to solve the underlying economic issues.  Sooner or later, they’re doomed to fail – and it may be sooner.  Cracks are already appearing in the economic facade.

China is engineering yet another mini-boom. Credit is picking up again. The Communist Party has helpfully outlawed falling equity prices.

Economic growth will almost certainly accelerate over the next few months, giving global commodity markets a brief reprieve.

Yet the underlying picture in China is going from bad to worse. Robin Brooks at Goldman Sachs estimates that capital outflows topped $224bn in the second quarter, a level “beyond anything seen historically”.

The Chinese central bank (PBOC) is being forced to run down the country’s foreign reserves to defend the yuan. This intervention is becoming chronic. The volume is rising. Mr Brooks calculates that the authorities sold $48bn of bonds between March and June.

Charles Dumas at Lombard Street Research says capital outflows – when will we start calling it capital flight? – have reached $800bn over the past year. These are frighteningly large sums of money.

. . .

The squeeze earlier this year came at the worst moment, just as the country was struggling to emerge from recession. I use the term recession advisedly. Looking back, we may conclude that the world economy came within a whisker of stalling in the first half of 2015.

The Dutch CPB’s world trade index shows that shipping volumes contracted by 1.2pc in May, and have been negative in four of the past five months. This is extremely rare. It would usually imply a global recession under the World Bank’s definition.

The epicentre of this crunch has clearly been in China, with cascade effects through Russia, Brazil and the commodity nexus.

Chinese industry ground to a halt earlier this year. Electricity use fell. Rail freight dropped at near double-digit rates. What had begun as a deliberate policy by Beijing to rein in excess credit escaped control, escalating into a vicious balance-sheet purge.

The Chinese authorities have tried to counter the slowdown by talking up an irresponsible stock market boom in the state-controlled media. This has been a fiasco of the first order.

The equity surge had no discernable effect on GDP growth, and probably diverted spending away from the real economy. The $4 trillion crash that followed has exposed the true reflexes of President Xi Jinping.

Half the shares traded in Shanghai and Shenzhen were suspended. New floats were halted. Some 300 corporate bosses were strong-armed into buying back their own shares. Police state tactics were used hunt down short sellers.

. . .

This use of “brute force” – in the words of Peking University professor Michael Pettis – has done the trick. Equities have recovered. How could they not do so, since selling was illegal, and not to buy was also illegal?

More at the link.  Bold, underlined text is my emphasis.

To use an analogy, it’s as if we were watching a levee holding back a river in flood.  We’re looking at it from the river side, seeing a levee that’s almost topped by the water, holding on inch by inch.  What we can’t see is that on the other side of the levee, there are lots of bureaucrats desperately stacking sandbags to reinforce it.  They’re even sticking their fingers into every crack or hole that appears, hoping against hope that they can stop the embankment from crumbling, allowing the floodwaters to sweep away everything.

Trouble is, those floodwaters aren’t receding . . . and China’s bureaucrats have almost run out of sandbags and fingers.



  1. In a way, this sounds like part of what went on with the Weimar government and the largest corporations in Germany in between 1920 and 1924 (when the hyperinflation kicked in [as compared to very high inflation]). Not the exact same thing, but the government and corporations trying to stop a process that was in part outside of their control. The psychology reads very much like. (See Ferguson's _When Money Dies_. Old but still worth reading.)


  2. The real question we're faced with is will China try to be North Korea – a country walled off from reality by sheer force of will, mass murder and fear – or will it return to the warring states period where strong men seize control of regions and battle for an illusory control of the Middle Kingdom?

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