China’s Stock Market Value Tops $10 Trillion for First Time - Politics | PoFo

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Bloomberg wrote:The value of Chinese stocks rose above $10 trillion for the first time, the latest milestone for the nation’s world-beating rally.

Companies with a primary listing in China are valued at $10.05 trillion, an increase of $6.7 trillion in 12 months, according to data compiled by Bloomberg. The gain alone is more than the $5 trillion size of Japan’s entire stock market. The U.S. is the biggest globally, at almost $25 trillion.

No other stock market has grown as much in dollar terms over a 12-month period, as Chinese individuals piled into the nation’s equities using borrowed funds to bet gains will continue. Valuations are now the highest in five years and margin debt has climbed to a record, all while the economy is mired in its weakest expansion since 1990.

“This a reflection of the risk-taking attitude of the public,” Hao Hong, the chief China strategist at Bocom International Holdings Co. in Hong Kong, said by phone on Sunday. “People are taking on an unreasonable amount of risk for deteriorating economic growth.”

Outside of China, investors aren’t showing the same enthusiasm toward the nation’s equities. Funds pulled a net $6.8 billion out of Chinese stock funds in the seven days through Wednesday, Barclays Plc. said in a research note, citing EPFR Global data. Dual-listed Chinese shares cost more than twice as much on average on mainland exchanges than they do in Hong Kong.

Stock Valuations

MSCI Inc.’s June 9 decision against including mainland equities in its benchmark gauge had little impact on the Shanghai Composite Index, which climbed 2.9 percent last week to its highest level since January 2008. Foreigners are limited by quotas when buying shares in Shanghai via an exchange link with Hong Kong, while similar access to Shenzhen-traded stocks will likely start this year, according to the Hong Kong bourse. Lex edit: I highlight this because it explains why stocks can be worth twice as much in Hong Kong than Shanghai - normally you could arbitrage the fuck out of that and the prices would equalize, but there are capital controls

The Shanghai gauge has rallied 152 percent in the past 12 months, the most among global benchmark indexes tracked by Bloomberg, and trades at about 26 times reported earnings. Less than a year ago, the gauge was valued at about 9.6 times, the lowest since at least 1998. The Shenzhen Composite Index, tracking stocks on the smaller of China’s two exchanges, trades at 77 times profits after surging 194 percent.

Gains have been fueled by speculation the government will take more steps to boost growth. HSBC Holdings Plc predicts a 50-basis-point cut in lenders’ required reserves in the “coming weeks,” while Societe Generale AG said one more is needed before the end of June. That would be the third reduction this year.

Trading Accounts

While the latest data showed the economy stabilizing, indicators from retail sales to industrial output are still growing near the slowest pace in years and trade remains weak. Exports slumped in May and imports declined for a seventh month.

Profits in the Chinese gauge trailed analyst estimates by the most in six years in 2014 as economic growth slowed to 7.4 percent, the slowest pace in more than two decades.

Mainland investors’ fervor for stocks remains undaunted, with a record 4.4 million trading accounts opened in the final week of May, and margin debt on the Shanghai exchange rising to a record 1.44 trillion yuan ($232 billion) on June 11.

Every couple days I read another "Batshit Crazy Numbers In China" story. This one I like: An entire Japan (well, Japanese stock market) has been created in paper wealth in the last year in China.

The same stocks in China are worth twice as much as what they're worth in Hong Kong. If the world were sane, a share of Company X should be worth Y yuan in Hong Kong and Y yuan. A ruthless and cynical arbitrageur would sell the stock in China and buy it in Hong Kong, the prices would converge, and the arbitrageur would walk away with a risk-free profit and people would complain about how much money he makes. But this does not happen because China has huge walls of capital controls (that they are carefully dismantling) that prevent that trade.

There are stranger ones:


This is a hilarious chart of Beijing Baofeng, a Chinese technology company that went public in March. Every single day it has gone limit up (that is, it has gone up as far as the stock exchange's rules will allow it). It has gone up 42-fold since March. This is not the natural order of things. When a company goes public in a well-ordered market, it should come within, say, an order of magnitude of its fair market price.

There is the sad story of Zhuhai Zhongfu, which bottles Coca Cola in China. The company soared 126% just this year. The company then defaulted! The stock price had no relation to the company's actual value whatsoever (it even makes Western traders blush).

The reason for this craziness - and I have not seen anyone describe this as sustainable - is that China is on the one hand attempting to maintain growth, and on the other hand restrain a bubble that it correctly sees. The problems is that these two goals are directly at odds with each other. China continues to pump money into a slowing economy to keep it growing, which comes in the form of debt. That wall of money keeps getting pushed around as China clamps down regulations on various parts of its financial system - first, it tightened down on traditional lenders, so the money moved into less-regulated "shadow banking" wealth management products. Then they clamped down on shadow banking, and the huge wall of money moved into stocks, which is the most volatile of traditional financial instruments. It's like getting a wrinkle out of a sheet - you push it down here, it just moves over, then you push it over there, it moves further, you push it down, it moves back where it was.

This has led to even fancier products as regulators move this wrinkle around.

Preferred stocks are fertile ground for the imaginations of bankers. They occupy a purgatory between the sylvan, idyllic, dare I say bucolic worlds of bonds, stocks, and first-generation derivatives. It is a Hieronymus Bosch painting of chimeras and monsters to satisfy all desires both subtle and gross. They are the wave-particle duality of finance; they embody a quantum superposition of equity and fixed income features. They come from the fever dreams of bankers imbibing the fine opiates of Tartary and there is nothing more dangerous in heaven or hell than a financial engineer with a vision.

And there are $53 billion of them in China whose sole purpose is to fool accountants into thinking they are stocks when they are not, that they are bonds when they are not. This is the froth of a massive financial bubble the likes of which the world has never seen.
I'm concerned about the effect such a bubble might have on the world economy, is there any foreseeable way to defuse it? Is the US going to be bailing out countries that are too big to fail now?

It would be history's final irony if China actually succeeded in sparking the Communist world revolution by inadvertently collapsing the world's capitalist economy.

...Or is it inadvertent...?
Why contain it? Zero-profit capitalism could manifest in reality if this keeps up. It is now too big to fail and has no choice but to survive as a mafia thug entity which merely 'needs to cool down a bit' which will perhaps 'be reorganised completely' later on when the right moment comes if it is not sustainable.

A.M. McBriar, 'Fabian Socialism and English Politics, 1884–1918', 1966 wrote:For the right moment you must wait, as Fabius did most patiently, when warring against Hannibal, though many censured his delays; but when the time comes you must strike hard, as Fabius did, or your waiting will be in vain, and fruitless.

Financiers will need to be dealt with eventually.
Potemkin wrote:It would be history's final irony if China actually succeeded in sparking the Communist world revolution by inadvertently collapsing the world's capitalist economy.

...Or is it inadvertent...?

An interesting idea, shades of the 'Golitsyn Thesis' perhaps, but interesting. The collapse of the world's capitalist economy is inevitable in any case, but there will be a moment when humanity will have to deal with the ultimate reactionary Fascism that will arise in the wake of that collapse, indeed, is already here.
annatar1914 wrote:An interesting idea, shades of the 'Golitsyn Thesis' perhaps, but interesting. The collapse of the world's capitalist economy is inevitable in any case, but there will be a moment when humanity will have to deal with the ultimate reactionary Fascism that will arise in the wake of that collapse, indeed, is already here.

The End is Nigh! Repent ye sinners! Any moment now teh Rapture commeth!
Lexington wrote:Every couple days I read another "Batshit Crazy Numbers In China" story.

Here's the latest one:

There Are Now More Stock Traders in China Than Communist Party Members

June 30, 2015 — 6:07 PM EDT

Updated on June 30, 2015 — 9:51 PM EDT

Stock investors of the world unite!

For the first time in modern China, capitalists have outnumbered Communists. More than 90 million Chinese now trade stocks, according to China Securities Depository and Clearing Co. That compares with 87.8 million Communist Party members at the end of last year, the state-run Xinhua News Agency reported June 29, two days before the 94th anniversary of the party’s founding.

It’s safe to assume this is not what Mao Zedong envisioned when he led the Communists to power in 1949, and it presents tricky challenges for President Xi Jinping. A record number of investors, more than the population of Germany, flocked to the stock market over the past year as the Shanghai Composite Index doubled. Now, the boom is at risk of turning into a bust after the benchmark tumbled more than 20 percent from its June 12 peak through Monday, leaving many retail investors bruised and undercutting China’s already sluggish economy. Link
Nattering Nabob wrote:Here's the latest one:

Yeah, I saw that one. They must have Mao strapped down tight to keep people from seeing him spinning in the mausoleum.

I've got a crazier number: $2 trillion:


So I posted this thread on the 14th; Chinese stocks have crashed 22% since then. $2 trillion is missing in China.

It doesn't look quite as awful if you zoom out a bit though:


Alternatively it shows how much further it could fall, but then that's always true.

What's surprising - and fortunate - is that so far there hasn't been much fallout from the crash. A lot of people borrowed money as stocks were soaring; there are bound to be a lot of people with stocks worth less than the debts they have. Like the housing bubble, these people have been borrowing and buying stocks (so called margin loans) and just like the housing bubble they're left hurting badly if those stocks are worth less than they borrowed to buy the stocks.

It could still turn around though, but I would argue that that would be even more dangerous since even where things are here, after losing 1/5 of their prices, the valuations are still very high.
I don't know the detail on this but I understand that government imposed capital constraints are keeping money in China, but once they are loosened there could be a flood of outward bound cash doing this to markets worldwide.

BTW Lex (and others) can you see (slowly) rising interest rates in the US impacting on Australian rates within the next two years?
China Tells Investors: Go Ahead, Bet the House on Stocks

July 2, 2015 — 12:00 PM EDT

Updated on July 3, 2015 — 3:00 AM EDT

In China, you can now literally bet the house on the nation’s tumultuous stock market.

Under new rules announced Wednesday by the country’s securities regulator, real estate has become an acceptable form of collateral for Chinese margin traders, who borrow money from securities firms to amplify their wagers on equities. That means if share prices fall enough, individual investors who pledge their homes could be at risk of losing them to a broker.

While the rule change was intended to help revive confidence in China’s $7.3 trillion stock market, down almost 30 percent in less than three weeks, analysts say securities firms may be reluctant to follow through. Accepting real estate as collateral would tether brokerages to another troubled sector of the economy, adding to risk-management challenges as they try to navigate the world’s most-volatile stock market.

“It does come across as relatively desperate,” said Wei Hou, an analyst at Sanford C. Bernstein & Co. in Hong Kong. “Globally, illiquid assets such as real estate are not accepted as collateral as they are very hard to liquidate.”

The new guidelines also permit non-listed shares and “other assets” as collateral for margin traders who have insufficient value in their stock accounts to repay loans. The China Securities Regulatory Commission didn’t respond to a faxed query on the changes, while Citic Securities Ltd., the nation’s biggest brokerage, declined to comment.

“This is simply not practical,” said Chen Gang, the chief investment officer at Shanghai Heqi Tongyi Asset Management Co. He joked with colleagues that brokers would have to become experts in everything from property to antiques, given the range of assets that clients could potentially pledge.

“Brokers are not stupid,” said Hao Hong, a China strategist at Bocom International Holdings Co. in Hong Kong. “I don’t think they would be willing to take this kind of collateral.”

The Shanghai Composite Index closed below the 4,000 level on Thursday for the first time since April, even after stock exchanges cut fees and the securities regulator rolled out its margin financing rule revisions more quickly than planned because of “market conditions.” Declines since June 12 have erased at least $2.4 trillion of value from Chinese shares, more than the entire market capitalization of France.

Margin traders, who boosted leveraged bets nine-fold to 2 trillion yuan ($322 billion) in the past two years, have been closing out those positions for a record eight straight days.

At Haitong Securities Co., China’s third-biggest brokerage, board secretary Huang Zhenghong said the firm was implementing the new rules, calling risks in its margin finance and securities lending business “controllable.” Huang didn’t comment on exactly what kinds of collateral Haitong will accept.

For Chen, relaxed rules on margin trading are unlikely to succeed in propping up the market. He said a half-year suspension of initial public offerings, which tend to weigh on the stock market because they divert funds from existing shares, would be more effective.

“It’s like your girlfriend has broken up with you and then you decide to buy her a one-carat ring” instead of something much bigger, Chen said. “That’s useless.” Link

No cash no problem! Just bring in your car title and we'll lend you money and then you can buy on margin!

The only saving grace is the Chinese banks are owned by the govt and they can just write off the loans if things get too bad...
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