Oct 192018
 October 19, 2018  Posted by at 1:04 pm Primers Tagged with: , , , , , , , , , , , ,

M. C. Escher Meeting (Encounter) 1940


It’s no surprise that China has its own plunge protection team -but why were they so late?-, nor that Beijing blames its problems on Trump’s tariffs. GDP growth was disappointing at 6.5%, but who’s ever believed those almost always dead on numbers? It would be way more interesting to know what part of that growth has been based on debt and leverage. But that we don’t get to see.

So we turn elsewhere. How about the Shanghai Composite Index? It may not be a perfect reflection of the Chinese economy, no more than the S&P 500 is for the US, but it does raise some valid and curious questions.

Borrowing from Wolf Richter, here are some stats and a graph::
• Lowest since November 27, 2014, nearly four years ago
• Down 30% from its recent peak on January 24, 2018, (3,559.47)
• Down 52% from its last bubble peak on June 12, 2015 (5,166)
• Down 59% from its all-time bubble peak on October 16, 2007 (6,092)
• And back where it had first been on December 27, 2006, nearly 12 years ago.



The first thing I thought when I saw that was: how on earth is it possible that in an economy that’s supposedly been growing 6%+ for a decade, stocks have gone nowhere at all? And obviously the role of the Shanghai index is different from that of the S&P, the DAX or the FTSE, but at the alleged Chinese growth rate, the economy would have almost doubled in size in 10 years. And none of that is reflected in stocks?



And if you think Shenzhen is a better barometer of ‘real’ China, Tyler Durden had this graph yesterday. Not the same as Shanghai, but similar for sure.



But other aspects of the Chinese economy are perhaps more interesting, I think. China’s mom and pop are not typically in stocks. In the Zero Hedge article I took that graph from, there is also this:

“There’s a liquidity crisis in the stock market, and pledged shares are again starting to sound the alarm,” said Yang Hai, analyst at Kaiyuan Securities. [..] The fear is that if Beijing does nothing, the self-reinforcing liquidation is only set to get worse: with $603 billion of shares pledged as collateral for loans – or 11% of China’s market capitalization, – traders are increasingly concerned that forced sellers will tip the market into a downward spiral.

[..] China in June told brokerages to seek approval before selling large chunks of stock that have been pledged as collateral for loans, while the top financial regulator in August warned the industry that it’s closely watching corporate stock pledges. Neither of those warnings appears to have generated the desired outcome, and the result is that two-thirds of Shenzhen Composite stocks are now at 52-week lows or worse.

[..] what are investors to do in this time of panicked selling? Why demand more bailouts of course, like begging the National Team to step in and rescue them (just like in the housing market): “If there are no real policies to cure the array of problems and ailments in our market, no one will be willing to take the risk,” said Hai. “Authorities keep saying that there is room for more polices, but where are they?”

“It’s high time the state stepped in,” said Dong Baozhen, a fund manager at Beijing Tonglingshengtai Asset Management. “The national funds cannot just sit on the sidelines and watch this atmosphere of extreme pessimism.”

It’s this clamoring for the state to come to the rescue of people who are losing money that would appear to define China today, where there is a stock market and housing market, and many ‘investors’ making lots of money, but where the mentality still seems to lurk back to days of old whenever things don’t only go up in a straight line.

There was another report recently of people demonstrating outside a property developer’s office because the firm had lowered purchase prices by 30%. Those that had paid full price now stood to lose that 30%. This happens frequently, and it can get violent. Mom and pop are not in stocks, they are in real estate:

Property accounts for roughly 70 per cent of urban Chinese families’ total assets – a home is both wealth and status. People don’t want prices to increase too fast, but they don’t want them to fall too quickly either,” said Shao Yu, chief economist at Oriental Securities.

The Chinese are thinking about leaders from Deng Xiao Ping to Xi Jinping that it’s great if they steer the country in a direction where everyone can get rich, but when things go awry, it’s still Beijing’s task to solve the problems if and when they occur. I would expect the same kind of thing in many western countries where people have borrowed heavily into housing bubbles, I don’t see mass foreclosures in Sweden, Denmark, Holland, but bailouts of people who grossly overpaid.

But the Chinese go a step further in their demands from central government. And that is an enormous problem for Xi going forward. One crucial facet of all this is psychological: when people count on being bailed out by their government, they will take much more risk, borrow more, with higher leverage etc. If you allow people things like pledging shares to buy more shares, or homes, and shares fall, you have an issue.

China’s well-known for companies buying each other’s shares to appear viable. It’s also known for local governments borrowing heavily from shadow banks in order for party officials to look as if they’re performing real well.

Now of course, if Beijing keeps on presenting all those growth numbers that look so solid, it’s asking for it. Moreover, the Party has lost control over the shadow banks, and it couldn’t act to regain that control if it wanted. It could initiate a program to forgive debt owed to national banks, but what’s owed to the shadows will have to be paid. We’re talking many trillions.

The Party has let the shadows in, because it made its own debt numbers look so much better. But when this whole debt balloon, on which so much of the GDP growth has rested, and the roads to nowhere and empty apartment blocks and cities, starts to pop, who are the Chinese going to turn to? For that matter, who is Xi going to turn to?

Yes, much of the western wealth has turned into a mirage, but in that respect, too, China has done what we did in a fraction of the time. Trump’s tariffs may play a role in a slowdown, but wait until the western economies deflate their debt bubbles and stop buying much of China’s products.

Bubbles vs balloons, that seems a proper way to phrase this. And for better or for worse, Jerome Powell is hiking interest rates. There’s your Needles and Pins.



Home Forums Bubbles, Balloons, Needles and Pins

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    M. C. Escher Meeting (Encounter) 1940   It’s no surprise that China has its own plunge protection team -but why were they so late?-, nor that Bei
    [See the full post at: Bubbles, Balloons, Needles and Pins]

    V. Arnold

    Apparently the Chinese are as ignorant of economics as Americans.
    How can that possibly end well…


    Apparently the Chinese are as ignorant of economics as Americans.

    ” …. 6%+ for a decade …. doubled in size in 10 years. And none of that is reflected in stocks?”

    China has reported its slowest quarterly growth rate since the global financial crisis.
    Third quarter growth misses expectations at 6.5%
    Down 59% from its all-time bubble peak on October 16, 2007 (6,092)

    I’m going to start to be concerned when there is a shortage of popcorn and the Dow returns to the peak of the 2007 bubble. Watch the new entertainment program available at THE AUTOMATIC EARTH. (It is similar to “SURVIVOR”)



    The S&P 500 declined 57.8% from its intraday high of 1,576.1 on October 11, 2007 to its low of 666.8 on March 6, 2009.

    There are more protections in the system against collapse that ever before and more awareness of what letting a crisis run wild will do to all national economies. This has made governments more likely to push on the regulatory side and more ready to dive in on the financial stability side. With any event approaching crash levels, we now get a near immediate government response aimed at slowing the panic and buying time for the market to adjust without collapsing systematically important institutions. (Related: Quantitative Easing: Does It Work?)


    CAPITALIST PREDATORS are fighting among themselves.

    Look at the proof …. refugees are on the move everywhere.

    Dr. D

    Quite so.

    Communist China was able to become a market society because they were adopting Capitalism 2.0: Central bank and central planners, rigging stocks, bonds, loans, and development, with all insider favors and bailouts. ….Just like us.

    They grow up so fast, don’t they?

    Now the inherent “distortions” as they say, have ruined the flow of the market mechanism and the gears are all gummed up. Since the corruption, fraud, the sand and rust and sugar taffy is everywhere, in every gear and pinon, every official is involved, they all made their fortunes on corruption for a generation and know only this, they can’t just pull a lever and start fresh. Big trouble ahead.

    And I’m talking about us. China may or may not be in the same situation. I don’t know. At least everyone over there understands there is no rule of law; only bureaucracy.


    If you look outside of LA-LA-LAND, you can find windmills.

    CAPITALIST PREDATORS are causing misery around the world.

    United Nations cash provides a vital lifeline for 180,000 Syrian refugee families living in Lebanon. But that’s only 30 percent of the refugee families; there are not enough funds to cover them all.
    The World Food Programme has to reassess the situation of all registered refugee families annually and make the decision to redirect its aid towards those who need it the most.

    Afghan refugees in Pakistan express little hope for the upcoming Afghanistan parliamentary elections but also dream of peace in the neighbouring war-torn country.

    Some 3,000 Central American migrants prepared to cross into Mexico from Guatemala on Friday with hopes of eventually arriving to the United States. Busloads of Mexican federal police were gathering in Ciudad Hidalgo and a Mexican military helicopter flew along the river in anticipation.



    Human trafficking is the world’s fastest growing global crime and the third most profitable organised crime after the trade in drugs and arms trade. An estimated 1.2 million children are trafficked every year for labour or sexual service purposes.

    For more than a year, children have been living in fear of the violence in the Kasai region of the Democratic Republic of Congo.

    The war in Yemen is now the world’s worst humanitarian crisis, with more than 22 million people — three-quarters of the population — in desperate need of aid and protection,United Nations Secretary General Antonio Guterres said.
    As the conflict enters its fourth year, millions are without access to clean drinking water and the country is at high risk of a cholera epidemic, Guterre said at a donor conference in Geneva on Tuesday.
    In Yemen, 2018 looks like it will be another grim year

    The Saudis have repeatedly justified their blockade of the western port of Hodeidah by arguing it is a major entry point for smuggled materiel. But fuel, food, medicine, electronics and arms enter ports across Yemen’s southern coast and over land borders with Saudi Arabia and Oman. Overland trade is worth tens, if not hundreds, of millions of dollars a month for everyone from the guys with guns at checkpoints to the top leadership on all sides. Weapons have become so widely available that the price of AK-47s and ammunition has gone down since the war began. Meanwhile, some groups are benefiting from the sale of oil and gas both to local and international markets.


    Diogenes Shrugged

    Quoting Charles Hugh Smith during the last few minutes of the interview linked below (issued today):

    “I think what’s going to happen in the next, say, five years between like 2018 and 2022 / 2023 is we’re going to get a huge recession, you know, depression with tons of unemployed people, debts that are going to default, pensions that are going to go unpaid, and there’s going to be a political crisis, and the Fed, if it still exists, which it probably will, they’re going to try to print their way out of it and they’ll just start GIVING AWAY TRILLIONS TO TRY TO KEEP THE ECONOMY AFLOAT. BUT THAT WILL CREATE INFLATION and rob all of us of our purchasing power, right, because our money is just fiat currency, right, it’s just based on trust. And, so, as people lose trust in paper money, then the economy really will crash, and then we’ll follow the path of Venezuela.”

    Earlier in the interview, Smith states, “The Fed is one of the most hated institutions because people finally after a decade of people like you and me talking about it, it’s seeped into the national consciousness that the Fed saved the super-wealthy, not the rest of us, and now … they don’t have the political leeway to save the banks again. There will be huge political resistance to that.”

    So, to whom will the Fed be “GIVING AWAY” trillions of “printed” dollars? This certainly flies in the face of the deflationary message maintained for years by the Automatic Earth. Isn’t this source of inflation already exhausted? Many years ago, TAE maintained that the inflation was almost entirely behind us, and that further inflation was becoming increasingly impossible. After all, interest rates can’t go much below zero.

    Ilargi: more than anything else, I’d appreciate a comment as to whether you agree with Smith’s prediction of inflation (after a period of bankruptcies), or whether you still see deflation as the driving force for the western nations’ collapsing economies over the coming decade. And again, if $trillions are “given,” then to whom?


    DS, the hyperinflation has already happened. The money has been printed. Too much money for the US economy to absorb. It just hasn’t been spent into the economy because we have not yet reached the psychological tripping point, the sudden loss if confidence. It may be that the trigger is a deflationary collapse first, followed by a repeat of the 2008 playbook, but on an even larger scale. The establishment institutions remain confident in the system, at least as measured by their behavior so far. The little guy might have lost confidence, but who cares? He is a slave to the system. Where can he go? I see a huge pile of tinder but no sparks anywhere on the horizon.

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