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Chinese Corporations Become Stock Speculators, Joining Housewives, Banana Vendors
It’s no secret that things are getting tougher for China’s manufacturing sector as the country embarks on a difficult transition from an investment-driven economy to a model led by services and consumption. Domestic demand for metals has fallen as “idle cranes, empty construction sites, and abandoned buildings” (to quote Bloomberg) betray a sharp economic deceleration. Export growth has slowed, rail freight has collapsed to what look like depression levels, and industrial production remains in the doldrums and will need to fall far further if China is serious about getting its pollution problem under control.
Meanwhile, Chinese equities have staged one of the most impressive rallies in recent memory as housewives, security guards, banana vendors, and, more recently, farmers, flock to the SHCOMP and the Shenzhen exchange where, using record margin debt, the semi-literate hordes have driven multiples into the stratosphere and created an environment where umbrella manufacturers post 2,000% gains.
Given the above, and given the fact that credit is increasingly hard to come by for in the manufacturing sector with China’s largest banks reporting rising NPLs thanks in large part to souring loans to the industrial sector, one could hardly blame the industrialists for wanting to get in on the equity mania. And because nothing surprises us when it comes to China’s stock market miracle, we can’t say we were completely shocked to learn that some manufacturers are laying off everyone and trading stocks from the shop floor while they wait for the economy to recover. WSJ has more:
Chinese companies are turning to an unlikely source for profits in the soft economy: the country’s red-hot stock markets.
Take Dong Jun, who earlier this year shut down his factory making lighting equipment and electrical wiring and let go some 100 workers. The 50-year-old comes to the plant in the eastern city of Yancheng almost daily, but spends his time trading stocks on behalf of his company, Yanwu Keda Electric Co.
“Manufacturing is a very hard business these days,” said Mr. Dong, chairman of the company. “I want to make some money from the stock market and use the profits to restart my manufacturing business later, when the economy turns for the better.”
Chinese companies are finding stock investing an attractive option as the wider economy struggles with tepid demand, excess industrial capacity, persistently high borrowing costs and other troubles. Their interest poses a challenge for policy makers, who want to nurture markets companies can tap for investment capital, rather than creating a venue for speculation.
You read that correctly, Dong Jun fired everyone and now goes to his lighting equipment plant everyday to trade stocks. And make no mistake, Dong isn’t alone. In fact, according to the Journal, 97% of profit growth in the manufacturing sector is being generated by stock trading:
According to the latest official data, profits earned by Chinese manufacturers rose 2.6% from a year earlier in April, a turnaround from a drop of 0.4% in the previous month. Yet nearly all of that increase—97%—came from securities investment income, data from the National Bureau of Statistics show. Excluding the investment income, China’s industrial profits were up 0.09%.
Meanwhile, over the course of 2014, the value of stocks, bonds and other tradable securities owned by listed Chinese companies rose by 946 billion yuan ($152.4 billion), a 60% increase, according to an analysis by Mr. Zhu.
So Chinese corporates are using their balance sheets to fund stock purchases which is something that US companies are also doing at a record pace but in China, companies aren't just buying their own stocks, they're buying anything and everything and they're doing it on margin:
The trend is starting to worry Chinese regulators, who have been trying to make sure that banks and the stock markets ultimately channel money into parts of the economy that create jobs. Even more problematic, according to some officials, is that the rush by companies to tap the market for easy gains now—sometimes using borrowed money to purchase stocks—could leave some scrambling for capital if the market turns.
China Railway Construction Corp. is among the companies that have put more of their funds at work in the stock market. According to its regulatory filings, the state-owned contractor since late last year has bought shares in companies including a liquor maker in Shanxi province, in the north, a retailer in central China, and a property developer near Beijing.
Better still, some companies are buying shares in Chinese banks — the same Chinese banks which, because lending to manufacturers has lower margins and has become more risky in the downturn, are helping brokers expand margin financing.
Bank stocks have proved attractive for China State Construction International Holdings Ltd., the listed arm of state-owned China State Construction Engineering Corp. It has increased its stakes in Bank of Communications Co., a large state-controlled firm, and Huaxia Bank Co., a regional lender, whose shares have been on the rise in recent months, according to data provider Wind Info. The company hasn’t released its first-quarter results. Officials at the firm didn’t respond to a request for comment.
Chinese banks, meanwhile, have been funneling funds to brokerages, helping them to expand their margin-financing businesses, a more lucrative practice than making plain corporate loans, according to banking executives and analysts.
China CITIC Bank Corp. is the most aggressive in lending to brokerages to help them finance their margin-financing businesses, according to an analysis by Reorient Group, a Hong Kong-based investment bank. Loans made to brokerages for that purpose totaled nearly 913 billion yuan in the first quarter, up 92% from a year earlier, the firm’s study shows. “Banks are happy to channel liquidity to brokerages as a way to participate in the stock rally,” said Steve Wang, head of China research at Reorient.
Essentially, banks are funding the purchase of their own stock by lending money via margin financing to the very same manufacturing sector which can't service its bank debt.
So we can add coporations to the list of Chinese stock speculators buying on margin. This means that if (or perhaps more appropriately "when") China's equity bubble does finally burst, corporate defaults (which are already on the rise and would likely occur far more often if the PBoC didn't pressure lenders into rolling over bad debt) will accelerate meaningfully amid cascading margin calls and frantic attempts to raise capital.
Bondholders beware. You were warned.
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This Time is Different.
If it's going to end at all, it's going to end in laughter, when Xi becomes Shit.
Woo, hoo!!!! NOTHING can go wrong here. Just look at the U.S!!!
Sum ting wong!...
"I knew it was time to sell when my shoeshine boy gave me a stock tip."
Joseph P. Kennedy, Sr
if a stock market is up +100% in a year, why NOT take advantage....
there will be a lot of losers but that's the same for anything. they'd be foolish NOT to try get at least 20-40% out of the market or they'll get left behind
just like US retail investors since 2012
another festivus miracle
Its a veritable stawk cornucopia! Everyone into the pool!
Weeeeee! ;-)
What could possibly go wrong?
The Corporations are generating returns for the shareholders, isn't that supposed to be their #1 focus??
/S
The deeper into the rabbit hole you go, the crazier things get.
China is following Western script. To fix one bubble they blow another. The stocks are high to enable payoff of real estate and export/ import massive loses they incurred for several years.
It is all like QE in US to payoff cronies of ruling oligarchs.
For last at least two decades China behaves as fascist state in every meaning of the word. Working people and any organizations that would truly protect health or any interests of workers are being destroyed. They benefit nothing from the whole western instigated and financed, by robbing western middle class, economic boom of China.
Before Chinese worker was making a dollar a month and paid one cent for bread. Now Chinese worker was making 100 dollars a month and pay one dollar for bread calling that improvement.
Remaining true communists are killed, in prisons or gagged. What we have is fascist state of fused state and private profit/public loss corporations and government via rampant cronyism with intimate ties to the western elites, themselves cultivating fascism, global fascism.
China is distinct part but nevertheless, a part of global political system run by world elites through central banking, united in quest form debauchery, gluttony, and psychotic drive to ultimate extermination of ordinary people.
The multiple decisions of China to follow western prescription only to maintain illusion of functioning world economy with ghost cities, millions un-bought cars hidden from view, fake exports to HK, collapse of energy demand and general consumption, ecological catastrophe and wide spread of poverty in China and elsewhere are clear evidences of harmony at top echelons of global elite, despite often personality conflicts misconstrued as political antagonisms.
Now China’s central bank, PBOC, after imposing politically motivated stimulus spending, to enable recent transition of power between two political mafias, embarked on a version of massive QE on the way to ZIRP to keep badly collapsed or deteriorated “good things” going joining US, Europe and Japan on the road to collapse of society.
China’s AIIB is clear example of China’s entering a path following the US imperial path after WWI and WWII to grow sagging economy by exploiting the world (global investment strategy and dedollarization) , in attempt to bring stability to their society that no longer can be exploited with satisfactory ROI without serious political consequences.
In other words, these are evidences that China began to depart from their Confucian historical perspective toward short-term political game. The greed of China’s ruling elites is sowing their demise as much as American ruling elite.
At age 54, I keep thinking that it really can't get any weirder, more sublime, less sane, batshit crazier...and I'm wrong, every single day I wake up.
it always gets more weird...you just need to roll with it: https://www.youtube.com/watch?v=H6DbQx4iDa0
same here.
the question is: what are YOU going to do about it?
Their market is turning out to be just like a PonXi scheme. Government is next in line after corporations. Hmmm... sounds familiar. Where can that be happening?
Remember when Gold was bottoming and a few Australian gold miners threw in the towel and became Porn portals?
See, nobody has to work or produce anything to be rich.
World economy perfected.
Time to hang up the towel the Ashkenazi won.
Debt spending is fun, until the bill comes due.
How is this any different from stock buybacks done by US-based corporations?
Those are being paid for with ZIRP loans ... which help crush the dollar even harder.
Off-hand, I would say one difference between this and stock buy-back is contagion risks.
If a company buys back its own stock, it's future poor performance is isolated to itself and other individual shareholders, who are probably not corporations with their own stocks and bonds.
If you have corporations buying stocks of other corporations speculatively for profit, and one does a Hanergy swan dive, then it can start the dominoes falling as the stocks and bonds of other companies invested in it start diving, too.
The unnoticed part of this whole fantastic scheme is that it plays out against a backdrop of an alleged planned national policy shift from exporting to servicing domestic demand.
Firing all your workers is not ultimately going to do much for propping up domestic demand.
The race is on between China and Japan.
Who will go smash-o first?
Or will it end in a tie?
Where did you say "the Gem of the Ocean" team is, tarabel?
Getting out of uniform in the locker room or still in the penalty box?
This bubble goes to 11