Bloomberg: U.S. Dot-Com Bubble Was Nothing Compared to Today’s China Prices

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Beijing to boost China’s teetering stock market
LINGLING WEI THE WALL STREET JOURNAL JULY 06, 2015 6:46AM

China’s central bank will help investors borrow to buy shares. Source: AFP
China is readying a massive injection of funds to try to reverse the country’s worst share sell-off in years, people familiar with the matter said.

Under the planned move, China’s central bank will indirectly help investors borrow to buy shares in a market that had already seen a rapid build-up in debt from so-called margin financing.

An unprecedented frenzy of measures over the past week culminated in weekend meetings by regulators and officials including Premier Li Keqiang, these people said. The result: a halt to new stock listings and a plan for the central bank to come to the aid of a market that has erased about $US2.4 trillion in value during a three-week decline.

In a statement late last night, the top securities regulator said the People’s Bank of China will “provide liquidity assistance” to China Securities Finance Corp, a company owned by the stock regulator. The company will use the money to lend to brokerages, which could then make loans to investors to buy stocks.

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This is the first time that funds from the central bank will be directed to institutions other than banks, a dramatic move that indicates leaders’ deep concern over a brewing stockmarket crisis.

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The exact amount to come from the central bank hasn’t been disclosed. The people with direct knowledge of the plan said no upper limit had bee set.

Over the weekend, pledges have come in from China’s big state-controlled securities firms, mutual funds and a unit of China’s giant sovereign-wealth fund to buy, buy, and buy.

In a statement by the Securities Association, 21 brokerages pledged to try to increase investments in the stock market as long as the Shanghai Composite Index stays below 4,500. The index closed down 5.77 per cent on Friday at 3686.92.

Until the recent sell-off, the stock rally had been one of the few bright spots in China’s economy. But a string of several-percentage-point market drops over the past weeks have served as near-daily economic mood dampeners.

The drastic intervention to rescue the market suggests leaders are concerned not only that the disorderly selling could spread to other parts of the financial system but that it could signal a wider loss of faith in the government’s ability to manage the economy.

By inserting what appears to be unlimited liquidity support from the central bank, the government “will effectively contain panic,” said Zhong Zhengsheng, director of economic research at Hua Chuang Securities, a state-owned brokerage.

Some economists question the wisdom of the all-out effort to protect stocks, saying that risks of significant damage to China’s broader economy are small, even if stocks were to fall further. One reason, they say, is that much of Chinese household wealth sits in banks or is tied up in real estate, with only a small portion invested in stocks.

The market-rescue measures could mean more harm down the road, they say, by reinforcing the idea that the government will come to the rescue whenever there is a crisis, undermining the progress China has made in allowing more room for risk in its financial system.

“The market simply went up too high and valuation was overstretched. There is no other alternative to a natural correction,” said Fred Hu, chairman of Primavera Capital, a private-equity firm in Beijing. With measures such as freezing initial public offerings, the government is “just repeating a policy mistake China has made over and over again in the past,” Mr Hu said.

At an emergency meeting presided over by Mr Li on Saturday, officials from China’s central bank and the Finance Ministry cautioned against using huge amounts of government funds to directly purchase beaten-down shares, for fears that would lead to more reckless investment behaviour down the road, according to the people with knowledge of the matter.

Getting the central bank to indirectly provide financing to brokerages represents a compromise, they said, as that will make the PBOC the lender of last resort as opposed to a source of bailout funds.

Beijing helped stocks start rising around a year ago with pro-market policies, including by giving investors new investment tools, such as the ability to buy stocks with borrowed funds. More access was granted to foreign investors in a link to the Hong Kong market, which also gave Chinese investors a new way to buy shares internationally. And investors were encouraged that credit would get easier because of the slowing in economic growth.

As the market more than doubled in a year, some of the world’s most respected financial firms said it made sense to buy stocks in China, including US mutual fund giant Vanguard Group.

Then, China’s stock-investing public rushed for the exits starting in mid-June, when a government effort to rein in margin trading forced many investors to unwind their leveraged bets. The stampede continued over two-plus weeks even as policy makers announced measure after measure aimed at slowing the selling.

The last dramatic fall in Chinese equities occurred in 2008, when the benchmark Shanghai Composite Index plunged 70 per cent in about a year. At the time, the authorities fiddled with fundraising requirements, nudged financial firms to buy shares and cut interest rates. The government’s seeming inability then to prop up the market caused widespread anger among investors but appeared to result in little economic damage to an economy that never depended much on a stock market.

Chinese shares eventually stabilised when Beijing introduced a $US568 billion stimulus plan in November 2008 that shielded the country from the global financial crisis but resulted in a property bubble and saddled the economy with debt.

What makes it more challenging for Beijing this time is the rapid build-up of debt in the latest bull run. Debt incurred by so-called margin financing, or investors borrowing funds to buy stocks, has risen almost fivefold over the past year to about two trillion yuan last month. Z-Ben Advisors, a consultant in Shanghai, estimates that margin debt today is the equivalent of up to 15 per cent of the value of China’s tradeable shares.

“This is a very high ratio,” said Ivan Shi, an analyst at Z-Ben. “In 2008, it didn’t exist.”

With many borrowers taking out loans using stocks as collateral, a drop in stock prices would mean banks are owed much more than the collateral is worth, resulting in more losses for the lenders while bad-loan levels already are rising.

Officials at China’s top banking regulator say they are looking into banks’ exposure to the stock market. But at the moment, there is no sign of any big bank or brokerage firm in severe distress as a result of the stock slide.

The recent government effort has also led to doubt over Beijing’s resolve to further open its financial markets to cross-border fund flows — a stated goal as China seeks to turn the yuan into a global currency. Until now, the stock market had been an area where the government had made substantial progress with implementing market-based changes, such as setting up a more-transparent process for Chinese companies to sell shares. It has also made it easier for foreign investors to trade Chinese shares.

“A sharp correction in stock prices could put economic reformers on the defensive and prompt a reconsideration of measures to reform financial markets, open up the capital account, and allow the currency to float more freely,” said Eswar Prasad, a Cornell University professor and former China head of the International Monetary Fund.

Meanwhile, many investors don’t regret their bets on stocks even in the face of the latest drops.

Li Ping was among those who sold homes to free up cash to invest in stocks, hoping for better returns.

In April, 51-year-old Ms Li sold her three-bedroom apartment in Beijing’s eastern Chaoyang district for 7 million yuan ($US1.13 million). Since then, she has parked 4 million yuan in the stock market via a fund manager.

“The fund that I have invested in is very mature and professional,” she said, adding that she thinks the market will stabilise and rise again.

Ms Li has a lot at stake. She now lives in a rented apartment with her husband near his workplace. Her older daughter is married but her younger daughter is going to high school in the US. Ms Li, who works in the insurance industry, said she needs her stock investment to yield more than 20 per cent a year to cover her daughter’s school fees and other expenses. “The yield I’m getting is definitely more than the rent I pay,” she said.

Wall Street Journal
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China Stock Plunge Leaves Market More Leveraged Than Ever Before
http://www.bloomberg.com/news/articles/2...ver-before
You can find more of my postings in http://investideas.net/forum/
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China Brokers Dust Off Wall Street Playbook From 1929 Crash (1)
2015-07-06 02:16:21.596 GMT


(Adds Monday’s trading in ninth paragraph.)

By Bloomberg News
(Bloomberg) -- On Wall Street in 1929, it was the great
banking houses of J.P. Morgan and Guaranty Trust Company.
In China today, it’s names like Citic Securities Co. and
Guotai Junan Securities Co.
They’re separated by 86 years and 7,300 miles, but Chinese
financiers are turning to the same playbook used by their
American counterparts to fight a crash that’s wiping out stock-
market fortunes on an unprecedented scale.
Investors in China are hoping it works out a lot better
this time around.
When five of America’s most-powerful financiers met at the
House of Morgan at 23 Wall Street on Oct. 24, 1929, the
immediate impact of their plan to pool resources and prop up the
market was encouraging: the panic of Black Thursday gave way to
a recovery and the New York Times lauded the bankers for putting
a floor under share prices.
The boost to confidence didn’t last long. The rout resumed
by the following Monday, with the Dow Jones Industrial Average
losing 13 percent. The gauge would go on to drop another 34
percent over the next three weeks, as the attached chart shows.
The support measures in China may also have a fleeting
impact, according to Hao Hong, a strategist at Bocom
International Holdings Co. in Hong Kong.
A group of 21 Chinese brokerages pledged on Saturday to
commit 120 billion yuan ($19.3 billion) to a large-cap stock
fund, designed to stabilize shares after the biggest three-week
rout in the Shanghai Composite Index since 1992. The move
coincided with a flurry of other market-boosting measures,
including a halt to initial public offerings and regulatory
moves to discourage short sellers.

Too Small

With daily turnover on Chinese markets approaching 2
trillion yuan, the support fund may be too small to have a
meaningful long-term impact, according to Hong. It also does
little to boost confidence in small-cap stocks, some of the
biggest losers during the rout. The Shanghai Composite rose 3.8
percent at 10:14 a.m. local time, after earlier climbing as much
as 7.8 percent.
“This 120 billion yuan won’t last for an hour in this
market,” Hong said by phone from Beijing Saturday. “It might
benefit blue-chip stocks, as investors may see them as value,
but the bursting of the bubble in small-cap/tech stocks is
likely to continue.”
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It seems like China stocks will continue to lao sai today and going into crash territory.

Stocks shopping time coming soon...

sent from my Galaxy Tab S
Virtual currencies are worth virtually nothing.
http://thebluefund.blogspot.com
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This would easily have tanked 20% in a day if it wasn't for the 10% limit down mechanism on China bourses.
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PRCs very creative...hahah..

中環在線:網民改圖 丁蟹「7.6」掟仔 - 李華華

http://hkm.appledaily.com/detail.php?gui...e=20150707

[Image: b0604a.jpg]

■《大時代》中丁蟹在香港交易廣場天台掟仔一幕,日期被網民改成「7月6日」。
以為「央媽」出面可以力撐大市,但市況好快「天氣不似預期,但要走,總要飛,道別不可再等你」,個個都爭先恐後不問價沽貨,祈求大市最終可以又一次「來回地獄又折返人間」不果。


今日最多人發的一張圖片,是《大時代》中丁蟹在香港交易廣場天台掟仔一幕,更指時間是「7月6日下午5時」。到底《大時代》係咪咁神,1992年已經預知23年後嘅今日會經歷大跌市,個個排住隊上天台?非也,查實係網民神改圖,將原先的「6月7日」改為「7月6日」。


另外,有一些人則發出有人在國際金融中心(IFC)跳樓的改圖,亦有人說「及早離去」,過去曾經每遇跌市,身邊總有一兩個朋友會發《大時代》丁蟹經典cap圖:「不要怕,只是技術性調整,不要怕」已消失不見,反映股民心態已由樂觀變成悲觀及觀望心態。
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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http://xueqiu.com/2657407918/50357830


[Image: 14e61f3920c2693fc917248e.png!custom.jpg]

今天也算是开了眼界了,如果加了杠杆,这些港股跌起来那真是一天就要倾家荡产啊。
转发(71)收藏赞助评论(108)
07-06 14:01来自雪球
"... but quitting while you're ahead is not the same as quitting." - Quote from the movie American Gangster
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The forces driving Beijing’s stockmarket desperation
BUSINESS SPECTATOR JULY 07, 2015 4:00PM

A stock investor sits slumped in front of a screen displaying the Shanghai Composite Index at a brokerage house in Qingdao in east China's Shandong province. Source: AP

The implosion occurring in China’s stockmarket might be dismissed as something peculiar to an undeveloped market in a communist state if it weren’t for the way the Chinese authorities have responded.

Their attempts to stabilise the market, which have seen more than $US3 trillion of paper wealth evaporate in the past few weeks, included a range of measures at the weekend: pumping central bank liquidity into the conduit for margin lending for China’s brokerages; obtaining pledges from the brokers to buy about $US20 billion of equities; urging state-owned enterprises and pension funds to buy shares; halting new public offerings; freezing trading in some stocks; and banning short-selling.

The extent, scale and range of actions — and the urgency with which they have been introduced — have more than a whiff of panic to them.

What’s as surprising as the authorities’ response is the lack of action until the market broke just under a month ago. It had, after all, risen nearly 150 per cent over the preceding 12 months. Even today, it’s still nearly 10 per cent higher than it was at the start of this year. The authorities have self-evidently been more concerned about the bursting of an obvious bubble than its creation.

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The unprecedented ‘kitchen sink’ response from the authorities does suggest that there may be something more than paper wealth evaporating in the sharemarket meltdown — that they are concerned about some more substantial threat to their financial system or real economy.

That may relate to how the bubble has been financed.

Historically the mainland market has moved broadly in line with the Hong Kong market but they started to diverge quite dramatically at the start of the year, with the Hang Seng performing quite modestly by comparison.

One could attribute the mainland market performance to an apparent policy decision a year ago to produce their own version of quantitative easing — encouraging investment in riskier assets in an attempt to support a slowing real economy.

With well-chronicled misallocation of capital within their financial system, the authorities have also been quite explicit about their desire to encourage the development of financial markets and the more efficient and precise pricing signals they provide for capital.

There was a particularly Chinese aspect to what has developed, with the heavily leveraged state-owned enterprises encouraged to reduce their debts by raising equity from the then-booming equity market.

The process, and the bubble, was itself funded and fuelled by an explosion of margin lending and investing, which has grown from very modest levels a year ago to nearly $250 billion today (although it is down from its peak). The authorities are, however, still trying to encourage margin debt in order to put a floor under the market.

In effect, poor quality loans to the state-owned enterprises and local governments have been replaced by margin loans to households in order to buy equities. It may be the impact on middle-class households, and on social order, that explains why the authorities have responded so dramatically to the market’s dive.

At the very least, they would want to slow the rate of decline to a somewhat more orderly and less panicked pace.

It is a setback for the shift of China towards more market-based drivers of economic activity and decision-making and for the credibility of China’s markets and financial system, which the authorities had been promising to make more transparent and laws-based.

The level of intervention demonstrates a lack of trust — which may be well-founded — in the market’s ability to find more stable and sustainable settings. In the process, of course, the authorities are creating a new form of moral hazard within the Chinese system, what could be called a ‘PRC Put’ for a market their actions say they believe is too big to be allowed to fail.
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I think its really a farce if almost 1/3 of the listed companies suspend trading to avoid share price drop. It damages confidence even further. I think MSCI made the right call in postponing inclusion..
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The New York Times

• Jul 7 2015 at 6:54 PM

• Updated Jul 7 2015 at 7:50 PM
China's plunging markets could take toll on Xi Jinping's leadership

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The faltering of Xi Jinping's economic measures dents his supremacy. Getty Images
by Keith Bradsher and Chris Buckley
For nearly three years, President Xi Jinping of China has crushed opposition by silencing and often locking up anyone who dares defy the government. But that aura of invincibility has been shaken by stock market speculators who have made a mockery of efforts to halt a steep slide in share prices.
The losses - Chinese shares have shed more than a quarter of their value in three weeks - pose an added risk, and possibly greater danger, to a global economy grappling with Greece's difficulties in repaying foreign loans and its possible exit from the euro. About $US2.7 trillion in value has evaporated since the Chinese stock market peaked on June 12. That is six times Greece's entire foreign debt, or 11 years of Greece's economic output.
Skeptical investors have so far shrugged off each step the government has taken to keep share prices aloft: an interest-rate cut, threats to punish rumormongers, allowing the national pension fund to buy stocks and even plans to investigate short-sellers who have placed bets that the market will fall.
The faltering of these measures has put an embarrassing dent in the halo of unruffled supremacy built up around Xi's administration, and this past weekend his government doubled down again, betting that it could beat bearish market sentiment into submission.
The government rolled out further initiatives in hopes of forestalling another market rout on Monday: 21 brokerage firms agreed on Saturday to set up a fund worth at least $US19.4 billion to buy blue-chip stocks, and both of the country's stock exchanges halted all new initial public offerings.
On Sunday, the government brought in the central bank, the People's Bank of China, and an investment arm of the country's sovereign wealth fund to support the effort.
The China Securities Regulatory Commission, which governs the stock markets, said that the central bank would give financial support to the state-controlled China Securities Finance Corp. to "enhance its capacity to safeguard market stability." The finance corporation lends to brokerage firms, which then lend the money to customers wanting to buy shares.
In addition, Central Huijin Investment, a company owned by the country's sovereign wealth fund that usually invests in banks and other financial institutions, said on its website that it had recently bought into investment funds traded on the stock exchanges and would continue to play a role in "market operations."
The Chinese stock market's plunge "is probably the most public and obvious instance where the government's omnipotence has been challenged," said Victor Shih, an associate professor at the University of California, San Diego, who studies the politics of financial policy making in China. "I think the last couple of weeks really showed that, no, they do not have the ability to make anything happen."
The recent stock market losses are equal to three months of China's economic output, which reached $US10.3 trillion last year. Economists increasingly worry that the losses may lead to a sharp drop in spending by Chinese consumers who have lost much of their savings.
A plunge in consumer confidence could deliver a shock to a Chinese economy that is already slowing, as the real estate market struggled to cope with millions of new but empty apartments and as hundreds of thousands of export-oriented factories face tepid overseas demand. And with China now the world's dominant market for commodities and the fastest-growing buyer of exports from manufacturing giants like Germany, the nose-dive in China's stock markets could hurt economic growth around the world.
"While turmoil in Greece has added to investor jitters of late, China's stock market slide could prove ultimately more damaging for the global economy," said Frederic Neumann, the co-head of Asian economic research at HSBC.
It could also have political ramifications. Harry Harding, a specialist in Chinese politics who is a visiting professor at the Hong Kong University of Science and Technology, said the plunge in the Chinese stock market could produce three successive ripples. The first would consist of investment losses for households, the second would lie in slower economic growth and the last would be a political backlash against Xi and his team.
Unlike his predecessor, Hu Jintao, Xi has taken direct control of economic policymaking. He and the premier, Li Keqiang, the country's second-ranking official, have been mute on the stock market's difficulties. Xi has also been unafraid of making enemies with an unrelenting anti-corruption campaign.
"There are significant forces who have their knives out for him and are waiting for him to fail," Harding said.
The effects are already being felt in homes across China. Individual investors own four-fifths of China's stocks, a far higher proportion than in Western markets, where institutional investors predominate. Chinese investors have 112 million accounts on the Shanghai stock market and 142 million accounts on the Shenzhen stock market; about 20 million accounts have opened this spring on each exchange, as novices have rushed to join a national fever of speculation.
Investors with heavy losses include He Wuhong, a Beijing middle school teacher and mother of a toddler. She and her husband invested nearly all of their $US65,000 in savings in China's stock market in late April and early May, only to see their account's value fall by almost half in recent days. She cannot even sell her shares; their prices fall 10 per cent each morning, resulting in an automatic suspension of trading for the rest of the day.
"My heart can't take it," she said. "We would probably sell off our holdings as soon as the market rebounds enough to make us even."
She is lucky in one way: Unlike many other investors, He did not borrow money to buy stocks. A ninefold increase in so-called margin lending by brokerage firms over the past two years helped fuel the rally.
Many families borrowed money from banks, finance companies, neighbours and others to play the market. Loans were made at annual interest rates of as much as 20 per cent, with borrowers allowed to put little of their own money into stock market investments.
That raises the question of how well China's financial system can absorb another round of bad loans when it is already burdened with a huge amount of lending to state-owned enterprises and local governments that can barely meet monthly interest payments. Shih, of the University of California, estimated that total margin debt in China, including informal loans made by the off-balance-sheet operations of banks, could approach $US1 trillion.
Making matters worse is that many owners of companies have financed expansion by borrowing from banks against the value of their shares. The terms of these loans typically demand that the owners post additional collateral if the shares come close to falling below the outstanding balance on the loan. That point is arriving for many companies, with the Shanghai stock market down 29 per cent in three weeks, its sharpest drop since 1992.
The problem for millions of investors is that share prices may not recover for years, if ever, for the more speculative stocks. Only a third of the Shanghai stock market, and even less of the Shenzhen market, consists of shares in large businesses.
The rest of the shares are mostly in small and midsize businesses, often with weak balance sheets and endemic corporate governance problems. Such companies are vulnerable to looting by their controlling shareholders at the expense of minority shareholders.
Shares in the big companies rose 20-to-30 per cent in the 12 months leading up to the Chinese market's peak on June 12. Hong Kong's stock market, increasingly dominated by big mainland Chinese companies, rose only 17 per cent in the period and has slipped 4.5 per cent as mainland markets have nose-dived.
But in those 12 months, shares in many small mainland companies quadrupled, quintupled or more, pulling the overall Shanghai market up 149 per cent.
Huge increases in percentage terms were possible because shares in hundreds of these companies were cheap a year ago. As their share prices began climbing, they drew in millions of first-time investors who bought shares simply because they were rising fast and seemed likely to continue doing so.
By contrast, foreign buyers and many domestic institutions cautiously gravitated toward larger companies' shares. Foreigners account for only about 4 per cent of the Chinese stock market and face severe restrictions on their ability to bet on price declines in China. Having missed the rise in shares over the past year, some now appear to be swooping in: On Friday, purchases in Shanghai by international investors in Hong Kong reached their third-highest daily volume since a new, government-backed market connection service between Hong Kong and Shanghai started last year.
Shirley Lin, a political economy professor at the Chinese University of Hong Kong who is a former Goldman Sachs partner, said that the stock market's fall could have a profound effect on China's economic policies and its pattern of economic growth in the months and years ahead. The government's difficulties in controlling the fall are likely to make policymakers more hesitant about further financial liberalization, she said, and the stock market rout is likely to further stunt the expansion of small and midsize companies.
These nimble companies have been among the biggest contributors to economic growth in China. They have long struggled, with little success, to obtain loans from state-controlled banks and had hoped to raise more money by selling shares instead. Those hopes seem to have been dashed.
"The first ones to go out of business will be the small and medium-sized businesses, and not the state-owned enterprises, which have not been contributing to China's economic growth," Lin said.
Xi's policy advisers are not ignorant of the risks facing China. Liu He, an economic policymaker close to Xi, wrote an essay in 2012 on lessons from previous international financial crises:
"After a crisis erupts, policymakers always confront the three big challenges of populism, nationalism and bringing politics and ideology into economic problems," he wrote. "Market forces constantly challenge government policies that lack conviction, and this makes the crisis even worse."
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