Massacre and cover up.
It was inevitable. The bubble had gotten too big. Its flimsy filament could no longer contain the air trapped within. It had to burst. And burst it dead, taking the fortunes of millions of ordinary citizens down with it.
Backdrop: 80% of the Chinese stock market comprised individuals (as opposed to institutional investors), many of whom, at the encouragement of the all-knowing and benevolent Chinese government, borrowed money in order to stake their fortunes in the market. This was known as ‘margin lending’; they were borrowing money (from shady sources such as p2p lending websites) with the shares themselves as collateral. Of course as share values and thus, collateral values started to fall, these ‘investors’ faced margin calls which they could not possibly meet.
As a result, the Chinese stock market inflated more than Pamela Anderson’s boob job, with the market growing far more than the rate of economic growth and the profits of the companies they were investing in. At its peak, half the companies listed on the Shanghai and Shenzhen exchanges were trading at above 85x price to earnings! Let me repeat that number, 85x!!!
Like I said, it was inevitable.
When prices started to fall and investors faced margin calls, they had no choice but to sell their shares, resulting in further downward pressure on the stock market; basically a negative feedback loop of money bleeding out into the ether.
The response of the Chinese government was basically straight out a Hollywood movie on repressive governments, they:
- Announced that they would be ‘taking action’ against ‘malicious short sellers’.
- Pressured large mutual funds and companies to buy more stocks.
- Imposed a 6-month ban on the selling of stock by holders of more than 5% of company stock.
- Suspended trading on about 1,300 companies, representing about 45% of the entire stock market.
- Arrested 197 people, including a journalist and stock market officials, for the super deadly crime of “spreading rumors”.
They also devalued the renminbi by about 4.6% to CNY6.3975 to the US dollar (Yay for the American consumer! Cheaper goods for all!).
What is the lesson in all this? Besides highlighting to the world that underlying economic forces and principles are not to be ignored (one commentator described the rise of the Chinese stock market as ‘completely untethered from reality’) it really highlighted a weakness in the illusion of a more free market economy that the Chinese government had tried so hard to maintain.
Of course we should ask, why did the Chinese government pump up their stock market in the first place? (This reminds me of the scene in Dodgeball: A True Underdog Story, with White Goodman’s inflatable jockstrap)
Basically, all the government did was look at the state of their economy and the level of corporate indebtedness (160% of GDP – USD16.1T- the largest in the world, and expected to increase to USD28.8T over the next five years) and say: hmmmmmmmmmm, what if we replaced all that debt with equity?
Of course, what happened was individuals (who again, were the majority of investors in the stock market), got into debt themselves in order to buy into the companies’ equity!
In effect, ordinary citizens again bailed out corporates, only instead of the Western scenario of taxpayer dollars bailing out too-big-to-fail companies, this bailout came by a more indirect route.
I suppose one could call this a fairer bailout, after all, nobody forced anyone to invest in the stock market. Corporate greed bailed out by individual greed. And the cycle continues…..
Until next time, and still writing from a Chinese-made laptop