China Now Risks "Financial Crisis"; Loses Could Be "In The Trillions" BofA Says

Tyler Durden's picture

“Regarding the deleveraging process in the market, in our view the government started too late & without adequate preparation for the potential downside. We suspect because it didn’t know the true extent of shadow margin financing activities.” 

That’s BofAML’s take on why Beijing is now throwing the kitchen sink at a Chinese equity market that’s sold off to the tune of 30% in the space of just three weeks, vaporizing $3 trillion in market value in the process.

Zero Hedge readers are by now well versed in the relatively brief history of unofficial, backdoor Chinese margin lending. This shadowy world, which includes umbrella trusts, structured funds, and P2P lending, has served to funnel somewhere in the neighborhood of CNY1 trillion into Chinese equities.

Apparently, the powers that be in China — who are quite adept at monitoring “threats” to the Party line and are quick to remove all traces of “objectionable” material from the internet — completely missed the giant margin bubble that was allowed to inflate outside of brokers’ books. A far more realistic explanation of course is that Beijing was well aware of what was going on but let it continue due to the fact that China’s world-beating equity rally was the only thing distracting the country from flatlining economic growth and a bursting real estate bubble.

Whatever the case may be, the margin mania unwind is upon us and as noted earlier today, nothing seems to be able to stop it. Not suspending compulsory liquidation for unmet margin calls, not billions in committed market support from brokerages, not a PBoC backstop for the CFSC, and not even a ban on selling by the Social Security Council (we’ll see when the SHCOMP opens on Wednesday morning if banning bearish language has any effect). 

As Chinese stocks climbed ever higher earlier this year, some commentators began to ask if a stock market collapse would have implications for the broader Chinese economy. In short, just about the last thing the country needs amid slumping global (not to mention domestic) demand is for a crisis of confidence in local equity markets to spill over into the real economy and derail consumer spending just as Beijing attempts to transition the country away from a smokestack model and towards an economic future characterized by services and consumption.

Generally speaking, the consensus was that any fallout from the bursting of the equity bubble would largely be confined to the financial markets. Now, analysts are very quietly starting to suggest that if the sell-off doesn’t end soon, it could metastasize and spread “far beyond the stock market.”

*  *  *

From BofAML:

The A-share correction: The damage could spread far beyond the stock market

A dent to market’s faith in government role

We believe that the biggest damage caused by the A-share market’s roller-coaster ride since the middle of last year has been to investors’ faith in the government’s ability to manage asset prices (stock, RMB, debt and even property) reasonably smoothly. The difficulty the government has faced to stabilize the stock market has demonstrated the downside of that faith. As a result, we expect many of these assets to be re-priced lower going forward. Also,the ripple effect from the market correction has yet to show up – we expect slower growth, poorer corporate earnings, and a higher risk of a financial crisis.

Many assets in China may get re-priced lower

We question the implementation of government policy in urging people to buy stocks. Regarding the deleveraging process in the market, in our view the government started too late & without adequate preparation for the potential downside (we suspect because it didn’t know the true extent of shadow margin financing activities) and it resorted to administrative control when the market turned down. So far, government measures have appeared to us to be behind the curve. As a result, we expect investors to assign less value to various perceived government “puts” going forward. The fall in the stock market could also make the government even more cautious towards QE and potentially using the property market or debt market to hold up growth, in our view – a burst of any of these bubbles, if fully developed, will be far more difficult to deal with than what’s happening in the stock market.

Real economy & corporate earnings will suffer

The net result of this volatile market is a transfer of wealth from the people on the street to the wealthy, including many major shareholders, who cashed out. We expect this will likely hurt consumption down the road. More critical is a potential distortion to credit flows due to the impairment to financial institutions’ balance sheets – as experience with Japanese banks shows, even if they don’t have to mark to market and book losses, their lending attitude may turn more cautious. Of course, the impact of a full-blown financial crisis in China, if it materializes, on the economy would likely be severe. On corporate earnings, other than the drag from slower growth, many companies may have to book stock-market related losses over the next few quarters by our assessment.

A possible trigger for a financial crisis in China

If the market continues to fall sharply, stock lending related losses could run into Rmb trillions, of which, banks and brokers may have to bear a meaningful share. These potential losses can be especially dangerous to brokers whose capital base is less than Rmb1tr. Even more important, the opaqueness of China’s financial system and the lack of clear definition of risk responsibility mean that contagion risk is high, similar to the subprime crisis. We had always considered the risk of a financial crisis in China as high. What has happened in the stock market has likely increased the risks considerably and also brought forward the timeline by our assessment – the leverage is much higher now and economic growth rate, potentially lower.

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We'll leave you with following chart from Morgan Stanley which should be enough to dispel the notion that the deleveraging in China might have run its course:

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JustObserving's picture

China addef $6 trillion in market cap in last year from a base of $4 trillion - so losing half of that is not such a big deal.  Except to the greater fools who came in late to the market.

JenkinsLane's picture

Depends upon how the losses and gains have been spread. If 10% enjoyed most of gains and 90% suffered most of losses, which is

probable, not good for broader economy.

El Oregonian's picture

As long as the fiat toilet paper doesn't run out, it will all be fine...

sarc off//

Pinto Currency's picture



China knew this would be coming which is why they've been telling their citizens to buy physical gold and silver on state run television since 2009.

Western govs, central banks and 'financial advisors' keep telling us to buy stocks and bonds with a view to the long term and we'll be just fine.

In the meantime, they prepare for the Jade Helm exercise to go live.

Now how about that DOW index.  Awesome 10 year returns.


JamesBond's picture

I guess this puts a stop to the thousands of chinese flying into Japan daily to buy the country out...




biggestbrother's picture

I think they will abandon ship all the faster

JenkinsLane's picture

What I find puzzling is how badly this has been managed by the powers that be in China. They should

have allowed the market to correct 50%, which it would have done very quickly were it not for their repeated

interventions, then began intervening, overtly and covertly, to ensure a gradual upwards glide path in their

indices. The Chinese media could then have loudly spun, "50% correction normal in bull markets, etc." and

provided the markets were rising gradually people would have believed it. All they would have needed to

do then is ensure there was not another unsustainable rise, which would not have been that difficult, given

the run this time around appears to have in large part been partly built on massive margin.


Seems to me like its amateur hour over at the PBoC.

Pinto Currency's picture



China needs a reason for transferring to gold Yuan that is internal and not an attempt to "crash the West".

This looks quite convenient to me as the chaos increases.

Element's picture

Have a close look at events in this chart JL.

I see in that the smart money realizing when the jig was about up, so they then massively hypes it and suckered in a flood of dumb money middle-class gamblers, on the frothiness and promise, and they supplied the money to get them out.

Now the Govt realizes it is left with the middle class stuck in a burning casino. Which is potentially a far even bigger problem for Beijing than the smart-money taking that hit, instead. Hence the govt feels totally compelled to intervene any way. Hey, a theory, and its thin, but that seems to be why the govt is panicking and trying to find a way to get them out before it fell this far.

If so the middle-class are going to be angrier and more reactive than the average zh denizen.

stocktivity's picture

I read where about 20% of the stocks are halted for trading and won't reopen until the selloff abates. If the selloff continues, at some point these share prices will have to be reset lower once they do open.


The Ingenious Gentleman's picture

51% of A-shares have now stopped trading.

KnuckleDragger-X's picture

Just stick the stocks in a bonded warehouse for awhile and let them rehypothocate and things will be shiny.....

Dr. Engali's picture

What a bunch of hypocrites. It's as if 2009 and the greatest wealth transfer from the poor and the middle class to the rich in the history of the world never happened with these fuckers.

Philo Beddoe's picture

zerohedge ‏@zerohedge 5m5 minutes ago Boom: CHINA TRADING HALTS LEAVE 43% OF ENTIRE STOCK MARKET FROZEN

For those that are not ont the twitter feed of ZH. This is how it will go down, kiddies. 

Dr. Engali's picture

Saw that. Behold, a glimpse into our future.

Philo Beddoe's picture

Sorry, sir, parks closed. There will be a bunch or real irate Clark W. Grizwalds with bee bee guns. 

suteibu's picture

Everything bad happens in the lands of America's enemies...cause they're not exceptional and they hate us for something or other. 

Besides, Obama keeps telling everyone that the economy has recovered.  Haven't you been paying attention?

disabledvet's picture

Yes, indeed I have.

"Ship I got destination you have or money NOOOOO...

i_call_you_my_base's picture

If the western banks and media start to pile on they're doing it as instructed.

Archive_file's picture

Notice there is almost no talk of Puerto Rico in the news? Cause it's America and not Greece. Don't want to let the cat out of the bag.

ClassicCommodity's picture

This is something at least. Still waiting for the grande finale. Popocorn is getting stale as fuck.

wendigo's picture
wendigo (not verified) Jul 7, 2015 8:11 PM

Does this take down everything with it, or can it be 'contained'? 

q99x2's picture

After a collapse in markets you can keep things going for 8 years by FRAUD, printing, sub-prime auto loans, buying MBSs and BTFD as long as you give control of the government and your military over to banksters and royal pedophiles.

papaswamp's picture
Looks like some panic is setting in... Headlines via Reuters :
  • China insurance regulator says to increase limit for insurers' investments in blue chip stocks
  • From 5% of total assets up to 10% (MNI says its up to 40%)

Another measure to support the market unveiled.

Whoa Dammit's picture

OT for all of us conspiracy theorists regarding today's F-16 collision:

A wallet was found amid the wreckage that fell near Lewisfield Plantation along the Cooper River about 25 miles north of Charleston. But crews were still looking for the victims’ bodies on land and in the water, the county coroner said


wendigo's picture
wendigo (not verified) Whoa Dammit Jul 7, 2015 8:21 PM

No passport, though? Without one I won't believe the official story. 

Whoa Dammit's picture

No passport. But witness say (in the link I posted above) that the F-16 hit the Cessna broadside, which seems rather odd.

JustObserving's picture
Goldman Sachs Says There’s No China Stock Bubble, Sees 27% Rally

Bloomberg breaking news: China Trading Halts Leave 43% of Entire Stock Market Frozen

WTF - Shanghai composite down 6.97%

disabledvet's picture

GEE THANKS "always on the other side of that trade" Goldman!

game theory's picture

Awesome that GS is pumping China's markets. They faked Greece into the euro and pocketed lots of fees to let that shit-show happen. Now they'll pocket more fees with their propaganda.  The recipe is simple...tell their clients to short China...tell the public to buy China...enjoy their reputation as people doing "God's work"...rinse...repeat. Next up, GS will fund Clinton to start a nation-wide email service that conveniently deletes all emails after one day.

biggestbrother's picture

Tell their clients to short china, 

Tell the public to buy china

Tell some of their clients to buy china

Buy insurance against the losses incurred by those of their clients they told to buy china. 


Win in the short

Win on the insurance for the buy. 


Some of their clients win

Some of their clients lose

EHH? same old same old

Quinvarius's picture

In case no one noticed, QEX started this week.  They just didn't announce it. The only thing they are printing more of than dollars are gold futures.  There is not going to be a tail event.  The Central Bankers are shitting their pants and they only have one setting...print.

OldPhart's picture

Hmm...looks like my expectations of a bump up in gold/silver followed by a serious drop are coming to fruition.

papaswamp's picture

How do we distract the people from their losses?

Blame US hackers then launch an attack on the US.


coast's picture

I guess China helping Greece is off the table?

foxmuldar's picture

Anyone noticed Dow Futures down 112? WTF it was down 200 today then closes up 100. At some point soon, its going to drop and not bounce. Perhaps the collapse of the Chinese market is finally being noticed. 

Bush Baby's picture

Swings like today Are a great strategy/teaser to give the BTFD'rs hope so they put everything back in that they pulled out.

Confirmation will be if the markets open way down tomorrow

You have to set up the pins in order to knock em down

Mini-Me's picture

When does this shit show finally unravel?

foxmuldar's picture

Shanghai down 7% in early trading. Hang Seng down 4.6%. Could this be the big one?

franzpick's picture

Impending EuroDollar and Greek bank collapse, oil-metal commodity crashes, Chinese and world equity reversals and breaks to long-term trend:  You have to consider it possibly being the Beginning of the big one.

nosam's picture
nosam (not verified) franzpick Jul 8, 2015 5:24 AM

The crash will come when the chosenites decide to "pull it". Not one day earlier or later.

foxmuldar's picture

Over 20% of Listed China stocks in trading halt. 

Dathedr's picture

Trillions of what? Paper? China can easilly print that amount.

Dathedr's picture

And it's even better if it's only digital pixels, as they get conjured instantly. Stupid Western trash propaganda! Muricano central bank FED is printing hundreds of billions dollares quarterly to cover huge losses in derivatives of those criminal centers also known as banks! Obviously Westerners think only they are allowed to print huge amounts of toilet paper currencies, and if others are doing the same, Westerners scream, foam and complain.

enloe creek's picture

We all mostly realize nothing is as it is advertised. Apparently alot of people can't grasp this or are not aware for other reasons. The government somehow in china and here are now in trouble because they have to maintain something that is not what they say it is. When the empire is seen as having no clothes the story gets to the good part. Do we see any skin yet?

buzzsaw99's picture

spoken like a true tbtf maggot.


Scooby Doo's picture

I lose faith when I read stuff like this....

"... transfer of wealth from the people on the street....We expect this will likely hurt consumption down the road"

Really? If the people on the street don't have any damn money, it will LIKELY(?!) hurt consumption? C'mon, man!