This page has been archived and commenting is disabled.
China Now Risks "Financial Crisis"; Loses Could Be "In The Trillions" BofA Says
“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.
* * *
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:

- 53143 reads
- Printer-friendly version
- Send to friend
- advertisements -


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.
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.
As long as the fiat toilet paper doesn't run out, it will all be fine...
sarc off//
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.
I guess this puts a stop to the thousands of chinese flying into Japan daily to buy the country out...
jb
I think they will abandon ship all the faster
Get the bitcoin before they do! http://freebitco.in/?r=25727
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.
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.
I like this theory.
Have a close look at events in this chart JL.
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2...
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.
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.
http://www.marketwatch.com/story/over-20-of-listed-china-stocks-now-in-t...
51% of A-shares have now stopped trading.
Just stick the stocks in a bonded warehouse for awhile and let them rehypothocate and things will be shiny.....
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.
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.
Saw that. Behold, a glimpse into our future.
Sorry, sir, parks closed. There will be a bunch or real irate Clark W. Grizwalds with bee bee guns.
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?
Yes, indeed I have.
"Ship I got destination you have or money NOOOOO...
If the western banks and media start to pile on they're doing it as instructed.
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.
This is something at least. Still waiting for the grande finale. Popocorn is getting stale as fuck.
Does this take down everything with it, or can it be 'contained'?
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.
Another measure to support the market unveiled.
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
http://www.postandcourier.com/article/20150707/PC16/150709558
No passport, though? Without one I won't believe the official story.
No passport. But witness say (in the link I posted above) that the F-16 hit the Cessna broadside, which seems rather odd.
http://www.bloomberg.com/news/articles/2015-07-07/goldman-sachs-says-the...
Bloomberg breaking news: China Trading Halts Leave 43% of Entire Stock Market Frozen
WTF - Shanghai composite down 6.97%
http://www.google.com/finance?cid=7521596
GEE THANKS "always on the other side of that trade" Goldman!
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.
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
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.
Hmm...looks like my expectations of a bump up in gold/silver followed by a serious drop are coming to fruition.
How do we distract the people from their losses?
Blame US hackers then launch an attack on the US.
Brilliant!
I guess China helping Greece is off the table?
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.
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
When does this shit show finally unravel?
Shanghai down 7% in early trading. Hang Seng down 4.6%. Could this be the big one?
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.
The crash will come when the chosenites decide to "pull it". Not one day earlier or later.
Over 20% of Listed China stocks in trading halt.
Trillions of what? Paper? China can easilly print that amount.
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.
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?
Don't look now but...well, look now:
http://www.bloomberg.com/quote/SHCOMP:IND
http://www.bloomberg.com/quote/HSI:IND
spoken like a true tbtf maggot.
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!
Couple more days of China equity evaporation and AAPL will drop to the terrible 2 figure level:
Chief Financial Officer Luca Maestri, on half of AAPL's sales coming from China: “The progress we’ve made in China has been remarkable and we continue to make incredible investments in China,” Maestri said. “The growth rate in China is significantly higher than most parts of the world.":
http://www.bloomberg.com/news/articles/2015-04-27/apple-s-iphones-sales-in-china-outsell-the-u-s-for-first-time
Now it makes ultimate sense why JP Morgan and Citi went massively short gold and silver recently. They new they were reaching the trigger point where the banks would crash the Chinese market and there would be massive collateral calls, trashing gold and silver.
Criminal banks 3, Chinese suckers 0
let me see if i have the fascist bac party line down correctly.
1) banks should keep lending and never book losses.
2) banks are the most important thing.
3) falling stock prices are bad for earnings.
When does this happen in the USA? Who in the FUCK would want to buy stocks in this market right now?
When does this happen in the USA? Who in the FUCK would want to buy stocks in this market right now?
I wonder how Jim Rogers is feeling now after moving to China and forcing his family to adopt Chinese culture, making his kids learn chinese and attend Chinese schools?! At least they have high speed rail as a way out.
Hong Kong Dollar still pegged to the UD Dollar and Hong Kong equities are at a record high.
Interesting to ponder that US Dollar peg from the standpoint of gold though...
Do you mean "LOSSES" could be in the trillions.
Sheesh, get an f'n editor already!!
The problem of misleading headlines: trillions of yuan, not dollars. For a number of month now, the yuan has been pegged at 6.20 to the dollar.
This is incorrect.
There is a Dollar/Yuan trading "BAND"...no hard peg though.
That exchange rates can and does absolutely move around a bit. The trend has always been "higher versus the dollar" I might add...
Paper Losses. They were not real, they were speculative numbers on computer screens. It was not real wealth that showed in stock indexes, but a fake wealth that did not exist. The hope of riches is gone, but there never was any real wealth there. As soon as people sought to cash in the fake gains, the stock prices tanked. That is what fake wealth is, something that when cashed in is found not to exist.
True Jack, but cash is the same thing, but I can still buy real resources with it. You do know that the paper on stawks turns into loans, cash and purchases (demand). When the paper on screens is gone the flow of physical trade stops as a result of no demand. Primarily because the people providing the real resources are not getting paid by the easy short term credit money to pay them with any longer. So they also can operate, nor trade, either.
I know that you know this Jack, so please explain the logic of your statement to yourself.
so simple -- easy come - easy go.
There will probably be some of those "meeting with the party" deals where the officials leave the meeting and there is now a gun on the desk.
Someone has some spalining to do.
Fuck...I guess I'm back to selling bananas.
"just as Beijing attempts to transition the country away from a smokestack model and towards an economic future characterized by services and consumption."
Yeah because this has worked so well for western economies...
Bet Long on bicycles, tip of the day