China Stock Panic: Beijing Announces Emergency Stabilization

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Source

http://www.forbes.com/sites/gordonchang/2015/07/05/chinas-emergency-stock-rescue-is-inadequate-ill-conceived/

 

China's Emergency Stock Rescue Is Inadequate, Ill-Conceived

Gordon G. Chang

 

Beijing has just unveiled its emergency rescue package for stocks.

First, the core of China’s plan, announcedSaturday afternoon, is a stabilization fund. Twenty-one brokerages will contribute at least 120 billion yuan ($19.3 billion), and the People’s Bank of China, the central bank, is expected to make available additional funds in some fashion. Moreover, it appears that China’s sovereign wealth fund will be providing money for stock purchases.

The fund will be initially used to buy ETFs investing in China’s blue chips. There have been suggestions that the fund will eventually buy shares of smaller companies.

The brokerages, which expressed “full confidence” in China’s capital markets, pledged not to sell their proprietary positions as long as the Shanghai Composite Index remains under 4,500 points. On Friday, the index closed at 3,686.92.

Listed brokerage houses also pledged to buy back their own shares.

Reports state that the brokerages were ordered to contribute their money by 11:00 A.M. Monday.

Second, 25 mutual fund companies will, on an expedited basis, establish new equity funds that will hold stocks for at least one year. Those companies will, alongside their customers, commit their own capital to the new vehicles.

Third, 28 Chinese companies announced they had suspended IPO plans that had already been approved by the Shanghai and Shenzhen authorities.

Beijing evidently felt the need to change investor perceptions. The Shanghai Composite fell 5.8% Friday on panic selling. Since its recent peak on June 12, the closely followed index has dropped 28.6%. The Shenzhen Composite is down 33.2% since its June 12 highpoint, and the Nasdaq-like ChiNext, a board of stocks traded in Shenzhen, is off 34.6% from June 3, its peak.

The rescue package will undoubtedly sooth nervous investors Monday—and perhaps for a few days afterwards—but will its effect be more than just temporary?

On the plus side, Saturday’s coordinated announcements, which resulted from a series of meetings in Beijing held immediately after the return of Premier Li Keqiang from Europe, indicate the seriousness of the central government’s efforts. There has been a raft of support measures announced in recent weeks—benchmark interest rate reductions, relaxation of margin rules, and the like—but none has had much effect, perhaps because the measures were revealed in piecemeal fashion. Premier Li gets an “A” for the optics of the coordinated weekend announcements.

Nonetheless, the announced measures look like they will only slow—and not prevent—further destruction of value, amounting to about $3.7 trillion at last count.

Why? First, there was no reason for stocks to start their bull run last summer other than the central government’s announced desire to push valuations higher. The bubble was certainly not supported by either a robust economy—GDP growth has substantially eroded—or surging corporate profits. Yes, fundamentals in China do not count for much on any given trading day, week, or month, but eventually they matter.

Second, the announced amount of rescue money looks woefully insufficient. The brokerage fund of $19.3 billion is equal to about 15% of recent daily trading volume. And volume can spike. The amount of the fund would be swamped on a day like May 28, when daily turnover in Shanghai and Shenzhen totaled $380 billion, surpassing turnover in the United States.

Third, the central government has been surreptitiously buying ETFs to shore up prices, something especially evident at the end of last month. It’s not clear the current buying plan is larger than amounts already committed to the market.

Moreover, the new ETF purchases will create demand for shares that are in the Shanghai Composite. That will obviously tend to push the index up, but retail punters, who largely fueled the rally in recent months and who are now panicking, are mostly invested in small caps. And it appears that margin calls are mostly related to the stock of the smaller companies.

Fourth, the new mutual funds to be launched make almost no sense. Which investor, at a time of panic and extreme volatility, is going to commit to a vehicle where there will be no sales for a year?

The plan, therefore, essentially contemplates that the 25 mutual fund companies will absorb losses. Also sustaining losses will be the 21 brokerage houses and all the companies that have recently announced, almost surely at Beijing’s initiation, that they will buy back their shares.

The overall package announced this weekend is unlikely to work for long, but the central government is determined to push prices higher. Therefore, expect new measures soon. What’s the next step?

Beijing could, as some have privately suggested this weekend, extend its price-support efforts by drawing on its foreign exchange reserves. The State Administration of Foreign Exchange could, for example, buy Chinese stocks through the Shanghai-Hong Kong Stock Connect, which permits offshore investors, through the Hong Kong Stock Exchange, to take positions in Chinese companies listed in Shanghai. SAFE already has buying operations in Hong Kong.

And there are many other tactics Beijing can employ. Yet ultimately, no plan, other than a shutdown of the exchanges, will stop the slide in prices. “Markets make fools of us all and the famed ability of the government to stop a crash is grossly overplayed,” Fraser Howie, co-author of Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise, noted about Beijing’s rescue plan. “Every downturn I have watched for 20 years in China had some story of the government supporting the market, and it never made much of a difference.”

And why will this particular plan fail? “It all strikes me as panic,” Howie said, “and since when has panic instilled confidence?”

[BLACKOUTbritney 22,369]

Is this legit? Someone stole her shoes backstage?

EDIT: Wrong thread xxo

[bionic 50,111]

Is this legit? Someone stole her shoes backstage?

 

Was this in the right thread?  

 

dead @ the thought that shoes going missing would force China to close the stock market tho

[BLACKOUTbritney 22,369]

Was this in the right thread?  

 

dead @ the thought that shoes going missing would force China to close the stock market tho

oops that was meant for the performance on jay leno thread

[Computer 10,980]

Is this legit? Someone stole her shoes backstage?

EDIT: Wrong thread xxo

Completely legit.

The sheer market panic effect being then felt in China though.

OT China has the cash to make anything happen in their stock market in the short term but it will cease to be a real market.  If they ever change course it will be a complete collapse, if not happening already tbh.

[Economy 52,835]

Completely legit.

The sheer market panic effect being then felt in China though.

OT China has the cash to make anything happen in their stock market in the short term but it will cease to be a real market.  If they ever change course it will be a complete collapse, if not happening already tbh.

I dont get why Governments in this day and age feel the need to not let business cycles happen and try to prop up everything artificailly for short term gain

 

crashes or recessions happen typically because of eccesses that were not sustainable during boom times and the bubble must burst so that the imbalances can be corrected...

 

interfearing with that natural cycle thas happened over and over and over again through out history is just plain dumb

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Another interesting read...

https://www.washingtonpost.com/world/asia_pacific/china-stock-market-crash-punches-a-hole-in-xis-china-dream/2015/07/08/13d22e66-2579-11e5-b621-b55e495e9b78_story.html

P/E multiples way over 100 and the government thinking they will avoid a crash?

China is really over for now.

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Some recovery as the support measures take effect:

http://mobile.reuters.com/article/idUSL3N0ZQ2LM20150710?irpc=932