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The government needed a safe place for Chinese people to put their savings to work but the stock market turned out not to be that safe. Now the government may have to hold off on some painful reforms to keep confidence and consumption up and cash flowing through the economy which would provide more time for China’s 3 bubbles to pop to the country’s detriment.
The above introductory comments (and the text below) are heavily edited excerpts from the original article* by Linette Lopez (businessinsider.com) entitled China is in the midst of a triple bubble which can be read in its entirety, complete with a number of charts & tables, HERE.
China is in the midst of a triple bubble:
- the third-biggest credit bubble of all time,
- the largest investment bubble (proxied by the investment share of GDP) and
- the second-biggest real-estate bubble.
This is occurring against a backdrop of:
- near record producer price deflation,
- near record low growth in bank deposits (the main source of internal liquidity),
- FX outflows (the main source of external liquidity), and
- falling house prices (with property accounting for the majority of household wealth).
Financial Stability Concerns
China’s stock-market slide has been stunning. Until June 12, the Shanghai Composite, mainland China’s biggest stock market, had enjoyed a glorious 150% rally for about a year. Then everything turned, and the indices death-dropped 30%.
What’s more, it seems nothing the Chinese government is doing — not rate cuts, not initial-public-offering cancellations, not going after “malicious short sellers,” not throwing almost $20 billion at the market, not forbidding big investors to sell stocks for six months — can stop it.
The Chinese stock market is only a tiny part of the economy representing less than 15% of household financial assets, and equity issuance accounts for less than 5% of total social financing so why is the Chinese government freaking out about such a small part of the country’s economy? Because the rest of it needs restructuring and the stock market was supposed to help out with that.
Economic Stability Concerns
Several years of a steady bull market would have helped to cover the restructuring phase but this stock market’s collapse is forcing the government to hold off on implementing its “new normal” phase — a phase President Xi Jinping promised would bring slower growth but more transparency and reform.
Political Stability Concerns
In the “new normal,” the government was planning to restructure its entire corporate sector — especially property firms — and cut off easy money to the local government-financing vehicles that were funding real-estate projects like mad. Any setback to the Third Plenum — the government’s master plan for China’s economy – would provide more time for China’s three bubbles to pop to the country’s detriment.
Social Stability Concerns
There’s more. The government probably didn’t have a choice of whether to put its plans on the back burner. Its top concern – social stability – is at stake here as well. China has one of the world’s highest retail-investor participation rates in the equity market and with the drastic fall in share prices recently, social stability is clearly at stake.
Maybe there’s a fourth bubble!
*http://www.businessinsider.com/china-is-in-the-midst-of-a-triple-bubble-2015-7
Other Articles of Interest on the Subject:
1. An annotated chart of China’s stock market boom and crash
2. What Are The Real Risks Of The Falling Chinese Stock Market?
3. China’s stock market crash has got people worrying about ‘social stability’
5. Here’s a simple explanation of why Chinese stock markets are in free fall right now
6. China says it’s ‘capable and confident’ of bringing stocks back to a ‘rational track’
7. China’s Policy Response To Its Equity Crash To Be Inflationary And Boost Gold
8. Leveraged Chinese “Investors” Learning Painful Lesson
9. Growth of Chinese Margin Accounts Drove Bubble – Now Drives the Crash
11. Goldman Sachs: Everyone’s wrong on China’s ‘fast and furious’ stock-market collapse
There is a saying in China, “That when the price of Rice is higher than the people can afford, there is revolution!”
If the Chinese Gov’t. is smart they will pacify the investors in the Chinese Stock Market by doing three things:
1. Put into place new controls that will give investors both inside China and outside China confidence that this will not happen again, by installing limits to trading, especially in the downward direction.
2. Investigate how this collapse occurred and even more more importantly who profited from it. If it turns out that one or more groups of insiders caused it, then all their accounts and/or profits should be forfeited and those responsible put into prison as an example for others.
3. Restore credibility by putting a percentage of all Government holdings into the Chinese Stock Market, so that the Government is affected by any downward collapses, which would insure regulatory compliance.