Economy

What The Chinese Stock Market Crash May Portend

Margin calls fuel China’s dramatic stock market collapse

From: The Guardian

china_flagAt the centre of this dramatic slide are individual investors borrowing from a broker to buy securities

What goes up, can also come down, as the old adage and the modern-day investor warning go. And that is precisely what the tens of millions of people who hold shares in China have been discovering.

Chinese stocks had doubled between last November and mid-June, to the delight of a fast-growing army of retail investors. In echoes of the dotcom bubble in the US, much of the speculation, fuelled by borrowing, has been on technology stocks. But now shares across all sectors are tumbling. After another punishing week, and despite a surprise move last week by the central bank to cut interest rates, shares are now down nearly 30% from their peak less than four weeks ago.

Analysts had doubted that cutting borrowing costs to stabilise a selloff in an overheated market would work even in the short term – there were fears it might well cause more alarm. In the longer term, making borrowing easier in response to a problem caused by debt-fuelled speculation made little sense. And so it proved. The panic selling continued this week and concern about investors’ debt levels intensified.

At the centre of this dramatic stock market slide are individual investors borrowing from a broker to buy securities. Under that system the broker can make a demand for more cash or other collateral if the price of the securities has fallen – known as a margin call.

Such trading has been a key driver of the booming market, but regulators are cracking down. The resulting falling share prices have in turn triggered margin calls. Investors and policymakers are looking on with fear because if those margin calls continue, investors will have to offload other assets to come up with the cash they need.

For those who trade with China, the contagion fears add to worries that have been bubbling for some time. China’s economy was already losing steam and the next GDP figures are expected to show the slowest growth since before the financial crisis. It might in time make the financial fallout from Greece look tame.

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China Scrambles to Put Plunge Protection Team Together: Banks Pledge Support For Crashing Market

From: Zero Hedge | by Tyler Durden

“The market is now a falling knife”, BofAML said on Friday, referring to the harrowing 30% decline in Chinese stocks that has unfolded over the course of just three weeks, leaving the PBoC and various other government agencies scrambling to arrest the slide.

Cuts to both policy rates (benchmark lending rate and RRR) and daily “remain calm” pronouncements by various government agencies have so far proven woefully inadequate to combat the country’s margin mania unwind, leaving BofA to conclude that the only thing which can help Chinese equities now is direct buying on the part of the government.

Combatting the unwind may mean, in BofAML’s words, making the government “the buyer of the last resort in the market, similar to what HKMA did in 1998.” This would however, be complicated by the fact that “much of the unauthorized margins were used to buy small cap stocks, so the authority, with or without PBoC’s direct involvement, may have to buy stocks on a very large & very broad scale.”

One day later and China has already moved in the direction of direct intervention in the markets, although it appears Beijing will try to orchestrate a “private” sector (whatever that means in China) solution first before going the nuclear route with the central bank’s balance sheet. As Bloomberg reports, the country’s largest brokerages are teaming up to invest nearly $20 billion in “blue chip” Chinese equities:

Chinese brokerage firms have come together to set up a stock-market fund, the latest effort to stem the biggest three-week drop in China’s key share index since 1992.

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Guess What Happened The Last Time The Chinese Stock Market Crashed Like This?

Reposted from: The Economic Collapse | by Michael Snyder

The second largest stock market in the entire world is collapsing right in front of our eyes.  Since hitting a peak in June, the most important Chinese stock market index has plummeted by well over 20 percent, and more than 3 trillion dollars of “paper wealth” has been wiped out.

Of course the Shanghai Composite Index is still way above the level it was sitting at exactly one year ago, but what is so disturbing about this current crash is that it is so similar to what we witnessed just prior to the great financial crisis of 2008 in the United States.  From October 2006 to October 2007, the Shanghai Composite Index more than tripled in value.  It was the greatest stock market surge in Chinese history.  But after hitting a peak, it began to fall dramatically.  From October 2007 to October 2008, the Shanghai Composite Index absolutely crashed.

In the end, more than two-thirds of all wealth in the market was completely wiped out.  You can see all of this on a chart that you can find right here.  What makes this so important to U.S. investors is the fact that Chinese stocks started crashing well before U.S. stocks started crashing during the last financial crisis, and now it is happening again.  Is this yet another sign that a U.S. stock market crash is imminent?

Over the past several months, I have been trying to hammer home the comparisons between what we are experiencing right now and the lead up to the U.S. financial crisis in the second half of 2008.  Today, I want to share with you an excerpt from a New York Times article that was published in April 2008.  At that time, the Chinese stock market crash was already well underway, but U.S. stocks were still in great shape…

The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.

Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.

This sounds almost exactly like what is happening in China right now.  First we witnessed a ridiculous Chinese stock market bubble form, and now we are watching a nightmarish sell off take place.  This next excerpt is from a Reuters article that was just published…

Shanghai’s benchmark share index crashed below 4,000 points for the first time since April – a key support level that analysts said had been seen as a line in the sand that Beijing had to defend, below which more conservative investors would start ejecting from their leveraged positions, widening the rout.

Chinese markets, which had risen as much as 110 percent from November to a peak in June, have collapsed at an incredibly rapid pace in since June 12, losing more than 20 percent in jaw-dropping volatility as money surges in and out of the market.

That drop has wiped out nearly $3 trillion in market capitalization, more than the GDP of Brazil.

Did you catch that last part?

The amount of wealth that has been wiped out during this Chinese stock market crash is already greater than the entire yearly GDP of Brazil.

To me, that is absolutely incredible.

And now that the global financial system is more interconnected than ever, what goes on over in China has a greater impact on the rest of the globe than ever before.  Today, China has the largest economy on the planet on a purchasing power basis, and the Chinese stock market “is the second largest in the world in terms of market capitalization”

Just as in 1929, flighty retail investors make up the bulk of China’s stock market and, just as in 1929 in the U.S., they have heavily margined their accounts. The Financial Times puts the number of retail investors in the Chinese stock market at 80 to 90 percent of the total market. Retail investors, unlike sophisticated institutional investors, are prone to panic selling, which explains the wild intraday swings in the Shanghai Composite over the past week.

Last night, the Shanghai Composite broke a key technical support level, closing below 4,000 at 3,912.77. The index is now down 24 percent since it peaked earlier this month and has wiped out more than $2.4 trillion in value. China’s stock market is the second largest in the world in terms of market capitalization, with the U.S. ranking number one.

Making world markets even more worried about the situation in China, its regulators are showing a similar brand of leadership as Mario Draghi. After previously pledging to trim back risky margin lending, they have now done a complete flip flop and are permitting individual brokerage firms to avoid selling out accounts that miss margin calls by setting their own guidelines on the amount of collateral needed.

I know that a lot of Americans don’t really care about what happens over in Asia, but when the second largest stock market in the entire world crashes, it is a very big deal.

The great financial crisis of 2015 has now begun, and it is just going to get much, much worse.  On Thursday, Ron Paul declared that “the day of reckoning is at hand“, and I agree with him.

So what comes next?

The following is what Phoenix Capital Research is anticipating…

By the time it’s all over, I expect:

1)   Numerous emerging market countries to default and most emerging market stocks to lose 50% of their value.

2)   The Euro to break below parity before the Eurozone is broken up (eventually some new version of the Euro to be introduced and remain below parity with the US Dollar).

3)   Japan to have defaulted and very likely enter hyperinflation.

4)   US stocks to lose at least 50% of their value and possibly fall as far as 400 on the S&P 500.

5)   Numerous “bail-ins” in which deposits are frozen and used to prop up insolvent banks.

I tend to agree with most of that. I don’t agree that the euro is going to go away, but I do agree that the eurozone is going to break up and be reconstituted in a new form eventually.  And yes, we are going to see tremendous inflation all over the world down the road, but I wouldn’t say that it is imminent in Japan or anywhere else.  But overall, I think that is a pretty good list.

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