“Beijing has lost the arm wrestle with the invisible hand of the market”
It started in July, by the end of July 7th trading in over 90% of the 2,774 shares listed on Chinese exchanges was suspended or halted. Shares have fallen by a third in less than a month, wiping out some $3.5 trillion in wealth, more than the total value of India’s stock market. It is not the plunge in share prices, however, nor the implications for the Chinese economy that are worrying, so much as the government’s striking attempts to bring the sell-off to a stop. Regulators capped short-selling; pension funds pledged to buy more stocks; the government suspended initial public offerings; and brokers created a fund to buy shares, backed by central-bank cash. This was the first stage of the story while selling-off was initiated by panicking individual investors (about 90 millions of them ).
The second stage started when the trend continued the next month in spite of state intervention. Big players in capital markets entered the game. Chinese shares plunged 8 % cent in early trade on so called Black Monday (August 24 and continued 7% following Tuesday.. The China illness became contagious in and some big markets showed significant nervousness . Sell-off followed August 21nd- Friday’s collapse of global share markets from the US to Asia on the back of poor Chinese manufacturing data. There where official announcements that big players deliberately persist on selling securities in spite of authorities commendations. Police are investigating people connected to the China Securities Regulatory Commission, Citic Securities Co. and Caijing magazine on suspicion of offenses including illegal securities trading and spreading false information, agency Xinhua reported. “We have reason to believe that more criminals and their hidden crimes will be exposed,” it said. Haitong Securities Co., GF Securities Co., Huatai Securities Co. and Founder Securities Co. — four of China’s largest brokerages — said they’re being investigated by the CSRC on suspicion of failing to comply with identity verification and “know-your-clients” requirements, according to statements to the Hong Kong and Shanghai exchanges.
Consecutive collapse in the Chinese stock market influenced global markets, proving significant interdependence of China’s capital markets with the rest of the world. So far it definitely increased volatility that means LACK OF CONFIDENCE on capital markets.
For example August 26th in New York, Dow Jones Industrial Average dropped 1.3 per cent. Earlier, European shares surged on the news of the Chinese central bank’s latest cuts, with Frankfurt, Paris and London gaining 5 per cent, 4.1 per cent and 3.1 per cent respectively.
Some analysts familiar with the situation stated that Chinese authorities have halted intervention in the stock market this week while still debating over the cost-effectiveness of supporting equity prices.
On August 14, the China Securities Finance Corporation CSFC, the main institution conducting s market rescue operations, transferred some of the shares it had bought to Central Huijin Investment, a sovereign wealth fund for blue chip bank and financial shares. The corporation’s balance sheet has expanded into more than two trillion RMB within just two months. The country’s securities regulator said the China Securities Finance Corporation would remain an important force in stabilizing the market. However, it would cease its routine market operation and it would only intervene in the event of extreme volatility. It actually signals the end of the market rescue operation. The China Securities Finance Corporation has bought more than 2 trillion Yuan worth of shares from the secondary market. These trades have been carried out with permission of the state and the central bank. However, the fund used is actually sourced from the big four state-owned commercial banks and it is not that cheap. Though the corporation is asked to play the role of saver, it still has to pay back these loans with interest!
Some observers call the series of events “the wrestling game between state interventionism and a market forces”. And so far the market (doubtfully free and fair playing ) is winning.
Intervention on securities market is one thing and we can say not the most important. As some observers say “in Shanghai and Beijing business looks as going as usual”.
The thing is, the stock market still plays a small role in China. The free traded shares value of Chinese markets—the amount available for trading—is just about a third of GDP, compared with more than 100% in developed economies. Less than 15% of household financial assets are invested in the stock market, which is why soaring shares did little to boost consumption and their crash should do little to hurt it. Many stocks were bought with debt, and the unwinding of these loans helps explain why the government has been unable to stop the panic. But such leverage is not a systemic risk; the loans are about 1.5% of total assets in the banking system. One has to remember however that Chinese are real gamblers. The ChiNext, a market for innovative start-ups similar as NASDAQ in USA, more than tripled in China and regulators act as approving and underwriting the initial public offerings (IPOs. Before long, the ChiNext price-to-earnings ratio (P/E) had reached 147, the same as NASDAQ during the dotcom bubble in USA (average for NYSE listings is merely about 17).
So the crash in the equity market in China is merely a side-show. The bigger concern should be the state of the economy. The foundations are definitely weaker. The economy is not that solid as it used to be, growth, is slowing, Manufacturing is growing slower although services sector growth is still rapid. However retail sales, presenting individual consumption, are still growing over 10% (year to year comparison). See graph below.
Again, August 27th the People’s Bank of China stepped in and announced a 0.25 per cent cut in both the benchmark lending and deposit rates, bringing down the one-year lending rate to 4.6 per cent and the deposit rate to 1.75 per cent.
In addition to the interest rate cuts, the bank also decided to lower required reserve ratios by another 0.5 percentage points, bringing it down from 18 per cent to 17.5 per cent. Chinese central bankers also managed to remove the rate ceiling for deposits of more than one year. It might be considered as another step towards full interest rate liberalization.
Liberalization of financial system and rebalancing the economy while trying to sustain a significant, some think unrealistic, rate of growth are complex and sometimes mutually incompatible goals. When it is combined with deliberately hostile activities of powerful actors the game is becoming dangerous. It looks as the real fight between big capital and big politics has started.
The graph below shows some significant government movements and stock exchanges performance during last months. State intervention does not look successful.
„More broadly, global investors appear to have lost their confidence in China’s leadership. The latest stock market decline only underscores the futility of its efforts to prop up share prices at higher levels in July. If officials have now stopped trying to use government money to manipulate the market, the sell-off may actually be positive. Even so, blind faith in China’s ability to navigate its many economic challenges has gone for good,” writes Peter Thal Larsen for Reuters.
 Peter Cai „China Observer” Aug 24,2015