PRC Economy - New Reflections : April 20 2015

[A_Gupta]

As the NYTimes puts it:
http://www.nytimes.com/2015/07/07/upsho ... arket.html

The Shanghai composite index began an upward tear in late 2014, soaring 151 percent from the start of July last year to the June 8 high.
{chart}
The chart shows how easy it is to frame market data in a way that sounds either scary or benign, depending on your inclination. “The Chinese stock market has dropped 26 percent in a month” is scary. “The Chinese stock market is up 83 percent over the last year” sounds great. Both are true.

In that sense, the people who have lost money in the last month are those who plowed money into Chinese stocks just in the last few months, aiming to take part in what seemed a rocket trajectory rise in prices. Anyone who has been invested for more than a few months is doing just fine, so far at least.

[amit]

As the NYTimes puts it:
http://www.nytimes.com/2015/07/07/upsho ... arket.html

The Shanghai composite index began an upward tear in late 2014, soaring 151 percent from the start of July last year to the June 8 high.
{chart}
The chart shows how easy it is to frame market data in a way that sounds either scary or benign, depending on your inclination. “The Chinese stock market has dropped 26 percent in a month” is scary. “The Chinese stock market is up 83 percent over the last year” sounds great. Both are true.

In that sense, the people who have lost money in the last month are those who plowed money into Chinese stocks just in the last few months, aiming to take part in what seemed a rocket trajectory rise in prices. Anyone who has been invested for more than a few months is doing just fine, so far at least.

Gupta ji,

NYT as usual is simplifying stuff to hide the real stuff.

Despite all the wealth etc, only around 5-6 per cent of Chinese own shares which is roughly equivalent to 90 million people.

Now when you consider that more that $2 trillion of value was wiped out to say that only those who invested in the past few months lost their shirts and those who invested earlier is gross over simplification.

For this to happen we would have to imagine that the current bunch of investors, that is those who lost their shirts are incredibly wealthy.

The more likely explanation is that there are new investors who came in the last few months but they are most likely a minority. The majority would be older investors who, when they saw how their stock values were skyrocketing, sold their shares (bought at a much lower prices - either all of it or in part), booked profit and used the money to buy more share of the same company at higher prices in the hope that the prices would go up even higher. That's how stock market bubbles work.

IMO the real situation is far more messy than the coy picture painted by NYT. It's been a blood bath on the Chinese market and most of the 90 million odd have lost their shirts and their nerve.

Added to this would also be institutional investors (local Chinese companies). They would have been hit badly as well.

It's no wonder the Eleven Jinping is still not able to get the situation under control.
JMT

[ashashi]

Now when you consider that more that $2 trillion of value was wiped out to say that only those who invested in the past few months lost their shirts and those who invested earlier is gross over simplification.

For this to happen we would have to imagine that the current bunch of investors, that is those who lost their shirts are incredibly wealthy.

The more likely explanation is that there are new investors who came in the last few months but they are most likely a minority. The majority would be older investors who, when they saw how their stock values were skyrocketing, sold their shares (bought at a much lower prices - either all of it or in part), booked profit and used the money to buy more share of the same company at higher prices in the hope that the prices would go up even higher. That's how stock market bubbles work.

Amit,

Couple of problems with your points above.

1. Individual wealth is immaterial. Shanghai Composite Index was this low about 3.5 months ago. For the first 2.25 months of that period, the index was zooming up. So, is quite possible anyone invested in the last 3.5 months lost money.

2. Amateur investors ride the growth, they dont book profits. You are describing traders. Amateur investors usually sell in panic when the stocks are falling.

3. Lost more people lost money in Chinese markets. Yesterday a variety of factors restricted the fall of Shanghai Composite index to only 1.29% where as smaller indexes fell over 6%. Look at the this site.
http://english.sse.com.cn/

[rsingh]

Nothing to wolly. It is just that all the Chinis took horidays at the same time. Today it is Gleece next day it could be Gelmany.........so they sold their stock and took cash with them. it will by all right by sept.

[RamaY]

China's Plunging Markets: Retail Investors Stunned by Rout


'The Great Fall of China' is hitting other markets

[vina]

Yawn.. Chinese Commie Govt encouraged the ordinary Chinese on the street to go gamble in the stock market, nay, exhorted even to do so by daily does of boosterism in commie controlled state media.

Well, the carefully constructed image of a "full in control /master of the universe/ emperor in the middle kingdom" kind of thing with the self image that the Commie party by it's command and control can control all things in the universe is going to come undone.

This is going to be a boom and bust, just on the lines of the 2007 to 2008 boom and bust (just look up chart of shanghai composite in Google Finance ). The average Chinese is going to take big big losses. No way he can get out. They have stopped trading in close to 1300 scrips worth 40% of market cap or around $3T .

The Chinese govt is going to discover the law of nature. Mark my words. If the 1980s stock bubble and real estate speculation is what did Japan in, it will be recorded that the Chinese bubble in real estate and stocks in the 2007 to 2015 period is what is going to do China in.

History is littered with multiple countries which failed precisely because of financial market instability. The countries that had the institutions and the background to manage that were the Anglo Saxon countries - Britain and America, and that was a large part of the reason why their currencies became global reserve currencies through history and they became the global hegemons of their time.

The Chinese until now were like the Japan of 1960s, unstoppable and invincible . Two years ago, they were like the Japan of 1980s, poised to take over the world. Now going forward, after the bubbles burst with disastrous consequences, they will look like the post 1990 Japan, a derelict wreck, with all the graphs pointing firmly downwards.

[A_Gupta]

http://www.chinasignpost.com/2015/06/14 ... wild-ride/

Quite to the contrary: real economy indicators suggest that the stock market is markedly decoupled from underlying economic reality. Juxtapose the massive speculative updraft in the Chinese stock market with weak electricity demand. Given China’s industrially-driven economic model, this reflects serious weakness (Exhibit 1). The Shanghai Stock Exchange has risen approximately 150% over the past year, while electricity consumption has flat-lined for the past five months and counting (Exhibit 2).

[A_Gupta]

http://www.washingtonpost.com/postevery ... -collapse/

Predicts that the economic impacts will not be great, the political impact will be large.

This doesn’t necessarily mean that financial contagion will infect China’s real economy. Chinese equity markets are pretty thin and small as a percentage of GDP compared to the developed world. Less than 20 percent of household assets were in the stock market. Financially, it would be difficult to argue that this is China’s Lehman moment

The one thing that these analysts and everyone else agrees upon is that this will put a serious dent into Xi Jinping’s efforts to liberalize the Chinese economy on issues ranging from capital account liberalization to simply letting the market play a ‘decisive’ role in the economy.

Critics who think the government has overreacted are particularly mystified by the fact that the market was not malfunctioning. Trades were closing, market participants were not failing and, if anything, a three-week, 30 per cent correction after a 12-month, 150 per cent surge seemed like a welcome adjustment.

But for Mr Xi’s administration, letting the market find its own level apparently involved a loss of control — and a level of risk — that it could not accept. It does not bode well for the rest of his reform agenda.

[A_Gupta]

IMO, the PRC economy had to transition from export-driven growth to domestic-demand driven growth for a variety of reasons. 80% of the Chinese stock market money is from small investors per the BBC, and this setback to their wealth is not an auspicious start to cranking up domestic demand. Are the Chinese problems deeper than that? I think the main threat is political -- a 4% growth rate for 2015 would simply not be politically acceptable for the Communist Party, which keeps its grip on power primarily by delivering on the economic front.

[member_27845]

http://www.livemint.com/Politics/fgtow0 ... Jim-R.html

Jim Rogers : " How do you see China—mid and long term?

I bought Chinese shares last week, even though it was going through the roof. China might be my largest position. China is going to be the next great country in the world and there is no doubt about that—the risk at this point in China is that it looks like there is a bubble developing and the market has doubled in less than a year. It is not a bubble yet, but it could be turning into one—a massive number of Chinese are opening brokerage accounts again, and markets are going straight up and people don’t know what they are buying. I am bullish on China—if it turns into a bubble, I have to sell. I don’t want to sell... China has got a great future. China is going to be the most important economy in the 21st century and not India"

I wonder if the mofo exited the China equities in time or got burnt like the 90 million small investors

[Suraj]

China’s Peak Steel Demand Threatens to Spark Trade Hostilities

China’s demand for steel has peaked, if the Japanese experience of the 1970s is anything to go by. That could spur more trade conflicts as the nation ships its excess production overseas.

The current decline in Chinese steel output signals the growth period for the commodity has ended in a country where the pace of economic expansion is slowing. Risaburo Nezu, a senior research adviser at RIETI, a think-tank linked to Japan’s trade ministry, expects a prolonged slump, with an absence of growth in demand likely for the next 10 or 20 years.

“Once a country attains a certain stage of economic development, demand for steel stops growing,” Nezu said last week in an interview in Tokyo. “China is left with excess capacity that’s said to be 300 million tons to 400 million tons, equivalent to three to four times Japanese output. It won’t be easy to deal with this.”

Nezu’s view mirrors concerns running deep through an industry battered by a flood of cheaper metal from China, maker of half the world’s steel. Waning demand in China and new supplies from emerging markets from India to Brazil are set to cool the market and potentially stoke tensions among suppliers.

The situation in China “could trigger more cases of trade measures among steel suppliers” to protect earnings, said Yoku Ihara, president of Growth & Value Stock Research. “The industry is facing more negative factors than positive.”

[Karthik S]

http://www.marketwatch.com/story/forget ... =mw_fb_ntk

[panduranghari]

China has permitted its pension funds to invest and buy stocks. I am willing to bet, the Chinese stock market will rise even higher than what it was 2 weeks back. Of course there will be incredible volatility. But it will be higher and higher. The herd will be lead off the cliff. But those willing to buy and hold, the returns will be very good. Until they collapse on the hubris of collective idiocy.

[Austin]

China has permitted its pension funds to invest and buy stocks.

I read they will allow 30 % investment for pension fund in stocks.

How is this different say compared to our own NPS which allows investment of pension fund in stocks ?

How much does Western country allows pension fund investement in stocks percentage wise ?

[Suraj]

It's different because they're asking pension funds to backstop the market in the midst of the biggest drop in value of an equity market since the 2007-08 crash, when it looks like the market has not found a bottom yet, after shedding $3 trillion in value.

Yes, others have done it in different ways, but the CPC's assertion always has been that they're not 'the others'. Their social contract is quite specific - the government gets to be explicitly repressive, in exchange for guaranteeing growth and harmony through those repressive measures. That means the CPC has an obligation to do things grandly, no matter what. When they say 'we're going to grab your land to build a high speed line' they better build the biggest network in the world, and subsidize its operations to make up for the social costs.

Right now they're not only not keeping the growth engine going as it sputters, but they're explicitly screwing with the harmony part as well, by first getting a 100 million new people investing, and causing them all to lose a good chuck of cash. That is not the PRC style of doing things at all. They impose an explicit cost of doing something, and then attempt to make up for it by developmental gains. Here's they're imposing costs on the people by making a mess of running a stock market by making the same mistakes others have made very recently, and being stupid enough not to learn from those lessons.

This is an action equivalent to encouraging 'peaceful protests in Tiananmen' as a form of social voice, and then again rushing in tanks to shoot at people when it all goes pear shaped. It's not a natural economic boom and busy phenomenon, but a badly executed political exercise, from an entity who are usually VERY cautious to not make such public mistakes. They did not provide people a caveat - 'invest at your own risk' - combined with an abundance of fiduciary caution. They explicitly said and did the reverse - "Invest because it's the glorious Chinese Dream thing to do. Don't worry about a market crash because we'll make sure it doesn't crash." Well now the market is crashing, never mind the percentage terms. The sheer absolute value in capitalization lost is staggering, especially over such a short period.

A democratic system lets the ruling entity make mistakes, because they can be replaced, and can also return to power. In China, making mistakes means popular revolt and overthrow. The CPC are deathly scared of revolution. Everyone since Mao has prioritized social order and harmony, even using tanks directed at its own people to ensure it. And yet they're explicitly screwing up here.

[panduranghari]

Also by 2023, the CPC wants economic parity with USA. Then to 2049 when military parity comes. They want a competing economic story called the 'Chinese Dream' which is like American dream. Listen to Kevin Rudd on youtube. He will explain it a lot better than what I ever can.

The social contract is to give every Chinese a equivalent American dream. It has basis on 7%plus economic growth.

[wig]

Just some random thoughts on the Chinese share market crash, which, by the way, is getting curiouser day by day.
now the Chinese government has suspended trade in about half the stocks. A state-owned wealth fund is supposedly buying something like $20bn worth of shares with a view to hold them until the Shanghai index had risen 20%. they are lowering the interest rates also. but strangely, the Shanghai Composite Index remains 72% above where it was 12 months ago. the knowledgeable are saying that The Chinese stock market is in a massive bubble, fuelled by margin lending and investors seeking better returns as the Chinese property market faltered.
it might even be a coterie of Chinese communist party higher ups who are the real losers. They might be holding some version of benami shares and minting money till recently; and now that the market has crashed palming it off as a matter of public interest to use public resources to recoup some of the losses.
a figure of 90 million people as quoted elsewhere on this forum might be based on Chinese accounting. Such massive crashes imply large / very large individual holdings. Very few persons have such massive investible surpluses.
and as one observes the Measures the Chinese government has introduced in the past week, going for greater margin lending, suspending stocks and now, stopping the release of new stock issues. They identify a deep seated panic in the minds of the powers that be.
Who but persons well appointed in the recesses of power could take the nation onto such a path where public money is pledged to stem a rout brought about by pure greed? This appears to be the deep Chinese state facing up to some home truths and taking the easy way out.
China is a command economy. How else could such a small number of shareholders influence such major decisions?
one other aspect; is that China’s ability to grow off the back of its cheap exports is in the past. The cost of labour and sundry other production costs are going inexorably up. So now the Chinese aim to produce more for internal consumption. But the other aspect is that it is going to be unlikely that China will be able to reach its target of 7% annual GDP growth.
I am not very sure of what domestic households will do. I doubt very many of them will have lost money on the stock markets. But if there is a rollback of the economy or slowing of growth- one can foresee difficult times for raw material exporters in Australia, Africa, and other places that export raw materials to china.

[member_28911]

^90million Chinese have investment in stock market which comprise of 15% of total household financial assets

[amit]

Just some random thoughts on the Chinese share market crash, which, by the way, is getting curiouser day by day.
now the Chinese government has suspended trade in about half the stocks. A state-owned wealth fund is supposedly buying something like $20bn worth of shares with a view to hold them until the Shanghai index had risen 20%. they are lowering the interest rates also. but strangely, the Shanghai Composite Index remains 72% above where it was 12 months ago. the knowledgeable are saying that The Chinese stock market is in a massive bubble, fuelled by margin lending and investors seeking better returns as the Chinese property market faltered.
it might even be a coterie of Chinese communist party higher ups who are the real losers. They might be holding some version of benami shares and minting money till recently; and now that the market has crashed palming it off as a matter of public interest to use public resources to recoup some of the losses.
a figure of 90 million people as quoted elsewhere on this forum might be based on Chinese accounting. Such massive crashes imply large / very large individual holdings. Very few persons have such massive investible surpluses.
and as one observes the Measures the Chinese government has introduced in the past week, going for greater margin lending, suspending stocks and now, stopping the release of new stock issues. They identify a deep seated panic in the minds of the powers that be.
Who but persons well appointed in the recesses of power could take the nation onto such a path where public money is pledged to stem a rout brought about by pure greed? This appears to be the deep Chinese state facing up to some home truths and taking the easy way out.
China is a command economy. How else could such a small number of shareholders influence such major decisions?
one other aspect; is that China’s ability to grow off the back of its cheap exports is in the past. The cost of labour and sundry other production costs are going inexorably up. So now the Chinese aim to produce more for internal consumption. But the other aspect is that it is going to be unlikely that China will be able to reach its target of 7% annual GDP growth.
I am not very sure of what domestic households will do. I doubt very many of them will have lost money on the stock markets. But if there is a rollback of the economy or slowing of growth- one can foresee difficult times for raw material exporters in Australia, Africa, and other places that export raw materials to china.

Wig,

Good analysis. You've summed it up very well. Only thing I would add is the crisis that will come from over-capacity especially in things like steel and cement production is going to make things even worse. The Bloomberg report linked on this page about steel is very illuminating. 300-400 million tons of excess capacity! Wow!

It's just not about what the Chinese will do with the steel, it's also about the thousands of people who are employed in these steel mills. I suspect they have a similar (though probably in smaller scale) problem with cement production. And of course the huge construction industry.

Even by Chinese standards they have run out of places to build. [As an aside I think the promise to invest $40 billion on Pakiland should be viewed in this context]

Idle capacity means unemployment and I personally think this stock market boom was engineered to keep up the "feel good" factor for citizens as part of the government's contribution to the "social contract" as growth rate plunges below 7 per cent. Now that it's badly gone wrong things can quickly turn very messy.

Just as others have speculated I wonder if China would want to divert attention by stoking nationalism against the Japanese? They are the best target, the average Chinese still hate them. The geo-political moves made by the Dragon need to be followed.

JMT

PS: A fall in raw material prices is good news for India!

[kapilrdave]

Its hard to believe that China has actually been able to use all that steel for all those years. I don't know how it will use that capacity going forward when there will be a slow down. It can't export it too as there seems to be excess capacity every where. Tata steels corus steel buyout is looking a bad investment now and Arcelor Mittal too is not doing so well. At least if UPA was there in India, it could have killed our industry and bought chinese steel.

The bolded part is tweetable. Please to tweet.

[asgkhan]

Where are the fifty centers ? Idiots may be attending le-education camps on spreading the propah-gandu of how the stock market crash is bringing harmony and peace in China-land.

[TSJones]

Where are the fifty centers ? Idiots may be attending le-education camps on spreading the propah-gandu of how the stock market crash is bringing harmony and peace in China-land.

they're in the US buying real estate and making sure mama-san has her anchor baby on time.

[chola]

Where are the fifty centers ? Idiots may be attending le-education camps on spreading the propah-gandu of how the stock market crash is bringing harmony and peace in China-land.

they're in the US buying real estate and making sure mama-san has her anchor baby on time.

Ah yes, the real estate and anchor babies. Wall Street has been trying to figure out a way to capitalize on this for the past five years. We've been trying to get them to funnel some of that wealth into funds instead of LA property and healthy eggs from blondes (yes, we had stories that eggs were bought from athletic Ivy-league blondes fertilized by the chini husband and inserted into the chini wife for a truly American-ized anchor baby.) lol.

But this is pretty unprecedented. We had Japanese and Gulf State oil sheikhs buying North American property over the years but nothing like this tsunami of capital. We're talking about an amount of money and monied people that simply overwhelmed government programs. The Canadians actually had to stop their $800K visa program because 90% of the applicants were from one country, the PRC.

Most likely they are the initial wave of rats running from a sinking ship.

But that said, I can't help but admire as a Wall Streeter to see the PRC hemorrhaging capital (with its wealthy and wicked buying US and Canadian real estate) and STILL have enough money among its retail investors to push a market up to the point where it can lose $3 trillion in a month's time. That's capital creation of the highest order.

Think about it -- $3 trillion is one and a half times Bharat's GDP. Most nations (not named the US or Japan) would have collapsed into hyperinflation ages ago printing money with the same abandon. But the PRC was able to not only print enough money to build ghost cities over a continental sized area but also blow up a $10 trillion equity market like a balloon.

The reason a non-US/Japan (say a Brazil or Zimbabwe) could not create the capital needed for infrastructure (or a multi-trillion dollar domestic equity market that can fund projects) is because the ability keep confidence in credit ends after a few hundred billions printed. Thereafter the more you print, the more worthless the paper becomes.

Now, this could be the one that sinks the PRC ship. But having seen their insolvent banks in the 1990s, I see no reason for the chinis to not cheat the laws of capital again and get out of this one without losing anything vital. Wall Street is still divided but the heaviest hitters among them, Fidelity and Goldman for examples, were already calling for buys Monday -- just in time for the 10% rebound over the past two days.

What Indians should be interested though, it is not the stock market itself (it is closed to most non-Chinese retail investors anyways.) What we should be interested in, is the chini ability to create capital in the trillions. Obviously, we would do better than to build ghost towns and stock bubbles once we create credit in the same magnitude but lets get the money first.

[TSJones]

stock goes up and down. a major portion of the value of stock is about timing.

get in at the right time and it is beautiful.

get in at the wrong time and it sucks.

so don't be over awed by the thought of the loss billions of dollars in value. the market in china has gone up by gazillions over the last few years.

these are still the same companies.

buy the companies' reported profitability not the speculative value of the stock.

if the company is reporting a slow down or some difficulties, then sell.

otherwise hold.

the only market play I would ever make is always, always, buy on Black Friday (or Black Monday, etc.)

[Austin]

The China Crash Is Not Over—–Five Viewpoints On The Turmoil Ahead

[chola]

stock goes up and down. a major portion of the value of stock is about timing.

get in at the right time and it is beautiful.

get in at the wrong time and it sucks.

so don't be over awed by the thought of the loss billions of dollars in value. the market in china has gone up by gazillions over the last few years.

these are still the same companies.

buy the companies' reported profitability not the speculative value of the stock.

if the company is reporting a slow down or some difficulties, then sell.

otherwise hold.

the only market play I would ever make is always, always, buy on Black Friday (or Black Monday, etc.)

Personally, I wouldn't touch China stocks with a ten-foot pole. Out of my comfort zone.

And no, I'm not awed by the loss. I saw Wall Street losses on a paper of $10 trillion during its trough in the 2007/2008 crash.

But what I am awed by is the ability of the chini state produce to capital (and credit -- which is capital to be repaid later) in such prodigious amounts that it can create such losses. Again, outside the US and Japan and the EU (if we're counting multi-state entities), nobody can print money at this level without going into hyperinflation ages ago.

India can't do this now. I want India to have that ability.

That said, the chini market is immensely interesting even though I would never touch it. It only grew over the past 8 months. It grew 150% during a very short period. It is the textbook example of a market bubble. And it was driven by the average retail investor not your institutional one which tells us on the Street that the average Zhang is going to get clobber a lot more than the institutional investors.

Before that spike 8 months ago, the chini stocks market was in the dumps. It was in the dumps when the chini consumer markets like cars and diapers were going gangbusters and we knew China was growing far faster than even its official rate of 10%. (When you have GM and VW making more money in China than the US or Europe during a period of 6 or 7 years, you not talking about 10% growth, it was more like 20%.)

The stock market was totally divorced from their actually economy (as measured by their consumption of products we could count i.e. Western items like Land Rovers and US pork exports.) When their economy was growing, their stocks were depressed. Now when their economy is weakening due to restructuring, their stock market soared (before crashing the last three weeks.)

This tells me that the PRC saw little use for the equity market during the good times but now due to their restructuring from an export economy, they are finally focusing on the equity market. So far they have most let market forces work. And those market forces first shot the thing up and then brought it down in terrifying speed.

But the obvious thing that the PRC could do and didn't do (yet) was to simply buy stocks with China state money. After a month of gyrations, they will end up doing just this. That is why Fidelity and Goldmans Sachs are recommending buys. It will be interesting to watch. I hope the commies fail spectacularly but I won't bet against them in this hybrid system where they could print money like water and not suffer inflation.

[Suraj]

What Indians should be interested though, it is not the stock market itself (it is closed to most non-Chinese retail investors anyways.) What we should be interested in, is the chini ability to create capital in the trillions. Obviously, we would do better than to build ghost towns and stock bubbles once we create credit in the same magnitude but lets get the money first.

I agree with you on this entirely. Their ability to harness and deploy capital has been nothing short of impressive, regardless of whether the investments themselves are worthwhile or not. The most pressing hurdle for many developing nations is simply the task of lining up the money and expertise to get something done quickly. Managing to overcome that and even gain the ability to export both capital and skill, is quite an accomplishment.

[member_20292]

Right - @Suraj, Chola.

And this basically comes from value-added manufacturing exports - fact lost on the Greeks, but not lost on the Germans, the Swiss and many others.

Not from IT (yet), not from oil.

[A_Gupta]

Sorry, stock run-up from margin trading is not creating capital.

[A_Gupta]

When trading in its shares resumed, Hangzhou Iron & Steel Co promptly went up 10%, which appears to be some kind of daily limit now imposed on the market.

Do tell me, from financial information on the web (e.g., its forward P/E is 40 or so; as far as I can tell in 2013 its earnings were negative and in 2015 its earnings are negative, my cursory search did not reveal 2014 data) and the current world-wide glut in iron & steel why this is justified; what is so awe-inspiring about this?

[Suraj]

This article says pretty much what I posted earlier in this page. This isn't an economic crisis as much as a political crisis. In fact it sounds so eerily like what I wrote that I wonder if the author saw the posts above.
The entire world learned a very important lesson about China this week

As the entire world watched mainland China's major stock indices plunge this week, it learned something very important about the country that, for the most part it didn't know before.

China is fragile.

After a massive 150% rally in the Shanghai Composite Index over the last year, on June 12 China's largest stock market (and it's smaller Shenzen Index) started to plummet.

Before the bleeding stopped on Thursday, Shanghai had erased gains from April, May, and June.

And the entire country was shocked — almost as shocked as the rest of the world. China's leading Communist Party (CCP) had been very clear. The people were to buy stocks, and so they did the whole year through up to this point — taking out high-interest-rate loans to do so with gusto.

So when the downturn came, it hit retail investors — who make up 25% of China's stock market — hard. The government tried to do everything it could to stop the stock slide. It ordered large investors not to sell for six months, launched an investigation into short sellers, threw almost $20 billion at the problem, canceled IPOs and more.

The Chinese people responded by blaming foreign bankers, waiting for their government to bail them out completely, and, in some extreme cases, committing suicide.

Almost the entire world thinks that China is about to or already has overtaken the US as the global superpower, according to a Pew Research Center Poll.
But a 30% stock market slide sent the entire government into emergency mode.

And that is because, despite what the world thinks, China is fragile.

More than anything, the government fears social unrest. In China, the CCP is carefully planning the future step by step, and if it is overthrown its entire project will be derailed.

Chinese people have made a trade for this kind of planning (and for what has been astonishing economic growth until recently) — they've traded in Western-style civil liberties like freedom of speech and expression. They've traded in a multiparty system.

Until the wider economy, not just the stock market, started slowing down last year, the trade was working.

And that's just it. If the Chinese people feel that trade isn't working out for them — if they see that the government's plans are not turning China into the superpower it wants to be — they may abandon the project.

That's why the stock market's collapse is so important to the government. Because it could make people stop believing in the trade.

"Besides the economic rationale behind making an outsized policy response, political considerations are equally important," wrote Credit Suisse analyst Dong Tao in a recent note. "China has one of the world's highest retail-investor participation rates in the equity market. With the drastic fall in share prices recently, we think social stability is clearly at stake."

[TSJones]

When trading in its shares resumed, Hangzhou Iron & Steel Co promptly went up 10%, which appears to be some kind of daily limit now imposed on the market.

Do tell me, from financial information on the web (e.g., its forward P/E is 40 or so; as far as I can tell in 2013 its earnings were negative and in 2015 its earnings are negative, my cursory search did not reveal 2014 data) and the current world-wide glut in iron & steel why this is justified; what is so awe-inspiring about this?

you wouldn't like it if you read amazon's financials either. amazon has rarely made a profit. but I will admit there is a world of difference between hangzhou and amazon in future potential profitability. amazon just keeps rolling its revenues into different product lines.

[Austin]

As Economy Worsens, China’s Wealthy Flee for Safe-Haven Western Real Estate

[Theo_Fidel]

TSJ,

There is no evidence that China has suddenly turned in world beating efficiency and productivity. One should remember the real panic in the USA and west over Japan was in its world beating industrial prowess. Back then Japanese technical know how was taking over the world, from six sigma to the deming awards to TQM. USA manufacturing in particular was hopelessly primitive. There no sign that China is setting the bench mark in anything. All it does is copy and produce stuff cheap. For all its claimed papers published is there a single new product that China has come up with. Even Japan had the Walkman moment, along with many others.

Despite the folks who are impressed by Panda Wonderland, personally I have never been impressed and it is not just the short visit there I made a few years ago. I'm also professionally annoyed that they stole a structural design from my employers and copied it without bothering to even notify us. What China reminds me of is the Soviet Union, complete with censorship and 5 year plans and bumbling bureaucrats. What they have built is not enduring and wealth producing but more wealth destroying. It works for a short time but then they will run out of daylight. When the Soviets hit a per capita income of ~ $12,000 they hit a brick wall. China will find it not easy to avoid that brick wall.

One little data point.

Number of workers in China ~ 800 Million.
Number of workers in USA ~ 160 million.

China miracle has been about throwing more and more numbers at every problem. More workers + More Capital. They are going to find out that sooner or later the shovel becomes so big, no one can afford to lift it.

[Singha]

As Economy Worsens, China’s Wealthy Flee for Safe-Haven Western Real Estate

this is going to run up the already overpriced real estate markets in bay area, SF, NYC, perhaps vancouver. this is capital flight from china and the rich hedging their bets and placing their children in western countries just as indian political/industrial elites do.

[TSJones]

TSJ,

There is no evidence that China has suddenly turned in world beating efficiency and productivity. One should remember the real panic in the USA and west over Japan was in its world beating industrial prowess. Back then Japanese technical know how was taking over the world, from six sigma to the deming awards to TQM. USA manufacturing in particular was hopelessly primitive. There no sign that China is setting the bench mark in anything. All it does is copy and produce stuff cheap. For all its claimed papers published is there a single new product that China has come up with. Even Japan had the Walkman moment, along with many others.

Despite the folks who are impressed by Panda Wonderland, personally I have never been impressed and it is not just the short visit there I made a few years ago. I'm also professionally annoyed that they stole a structural design from my employers and copied it without bothering to even notify us. What China reminds me of is the Soviet Union, complete with censorship and 5 year plans and bumbling bureaucrats. What they have built is not enduring and wealth producing but more wealth destroying. It works for a short time but then they will run out of daylight. When the Soviets hit a per capita income of ~ $12,000 they hit a brick wall. China will find it not easy to avoid that brick wall.

One little data point.

Number of workers in China ~ 800 Million.
Number of workers in USA ~ 160 million.

China miracle has been about throwing more and more numbers at every problem. More workers + More Capital. They are going to find out that sooner or later the shovel becomes so big, no one can afford to lift it.

I agree with what you are saying Theo. It's just that I think predictions of economic failure of the Chinese are way premature. They are very mercantilistic by nature and I don't see that changing. Mao was an aberation. So what I am saying is to buy the company not the market so-to-speak. If you see money deals laying around, pick it up and use it. "It's a wrench plumber" as my accounting teacher used to tell me.

OTOH, nobody's economy grows like a straight line graph. It goes up and down. Overall it may average up, but who knows where and when that will be. That was what I was trying to tell the 50 centers on this forum when they were crowing how China was going to be way larger by such and such date than the US for example. They may eventually wind up doing just that, but it may or may not happen by that date. In the end run, this is human activity we are talking about and thus subject to all the foibles there of. Pobody is nerfect. I would also point out that as an economy becomes more developed it is harder to maintain large growth rates as the low hanging fruit gets picked.

[Singha]

todays CNN has a big article on upper middle class chinese students going to any lengths incl faking extra-curricular activity and ghost writers for the personal letter. from a situation where india and china were sending equal number of grad students a few years ago, the article says india=12% and china=31% now.....annual spending is $8b

http://edition.cnn.com/2015/07/12/asia/ ... index.html

[amit]

OTOH, nobody's economy grows like a straight line graph. It goes up and down. Overall it may average up, but who knows where and when that will be. That was what I was trying to tell the 50 centers on this forum when they were crowing how China was going to be way larger by such and such date than the US for example. They may eventually wind up doing just that, but it may or may not happen by that date. In the end run, this is human activity we are talking about and thus subject to all the foibles there of. Pobody is nerfect. I would also point out that as an economy becomes more developed it is harder to maintain large growth rates as the low hanging fruit gets picked.

TSJ,

What you say here makes perfect economic sense for a normal economic model. Despite appearances China does not have a normal economic model.

Your point about China eventually overtaking the US but not by the date/year that has been stipulated by the CCP is perfectly valid but therein lies the problem. You see for the CCP to hold on to its credibility and its end of the bargain of the compact it has with the population that date is very important. If they miss the 2021 deadline by more than a couple of years - and it would be evident if they will miss or not from at least a few years before, the CCP and Eleven will develop credibility issues and this would entail all manner of bad things creeping out of the woodwork.

CCP realizes this, which is why this stock market bust has really spooked them. But as Theo mentions, throwing more money and people at a problem is being afflicted by the that most hoary of economic theories - Law of Diminishing Returns.

The other thing is, it's one thing to become No1. Its a totally different story about remaining there. To do so China has to transform into a normal country with warts and all, like the US is or for the matter India.

Can Eleven, his successors in the CCP manage to swing that? A lot of folks look at China's "hard" or "soft" landing in a economic context. I don't disagree but I also feel there's a social context as well. Will China's transformation into a normal society happen with a "soft" or "hard" landing?

The latter means CCPs days would be numbered are the pampered elites of the Party read for that?

[Singha]

the pampered elites have parked their children and plenty of funds in us/canada/aus as a hedge they will be ready as usual. even in a tinhorn phata chaddar country like TSP, the elites always have a plan-B (london) and plan-C (dubai).

its the middle class who will get hammered by any hard landing. they have huge home loans, a aspirational lifestyle, plans to educate kids etc.

[Theo_Fidel]

My basic question for China is not dissimilar to the question of Greece.

How do you afford your lifestyle?

You can’t have USA/EU type living while being ~ 1/10 as productive.