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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.

*  *  *

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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Tue, 07/07/2015 - 21:05 | 6282967 JustObserving
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.

Tue, 07/07/2015 - 21:07 | 6282969 JenkinsLane
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.

Tue, 07/07/2015 - 21:10 | 6282982 El Oregonian
El Oregonian's picture

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

sarc off//

Tue, 07/07/2015 - 21:18 | 6282985 Pinto Currency
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.

 

Tue, 07/07/2015 - 21:28 | 6283052 JamesBond
JamesBond's picture

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

 

 

jb

Wed, 07/08/2015 - 00:25 | 6283619 biggestbrother
biggestbrother's picture

I think they will abandon ship all the faster

Wed, 07/08/2015 - 03:12 | 6283885 bunzbunzbunz
bunzbunzbunz's picture

Get the bitcoin before they do! http://freebitco.in/?r=25727

Tue, 07/07/2015 - 21:17 | 6282989 JenkinsLane
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.

Tue, 07/07/2015 - 21:57 | 6283205 Pinto Currency
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.

Wed, 07/08/2015 - 06:48 | 6284097 explosivo
explosivo's picture

I like this theory.

Wed, 07/08/2015 - 06:20 | 6284071 Element
Element's picture

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.

Tue, 07/07/2015 - 21:35 | 6283061 stocktivity
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.

http://www.marketwatch.com/story/over-20-of-listed-china-stocks-now-in-t...

 

Tue, 07/07/2015 - 23:17 | 6283483 The Ingenious G...
The Ingenious Gentleman's picture

51% of A-shares have now stopped trading.

Tue, 07/07/2015 - 21:07 | 6282970 KnuckleDragger-X
KnuckleDragger-X's picture

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

Tue, 07/07/2015 - 21:13 | 6282975 Dr. Engali
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.

Tue, 07/07/2015 - 21:13 | 6282988 Philo Beddoe
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. 

Tue, 07/07/2015 - 21:15 | 6282994 Dr. Engali
Dr. Engali's picture

Saw that. Behold, a glimpse into our future.

Tue, 07/07/2015 - 21:17 | 6283004 Philo Beddoe
Philo Beddoe's picture

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

Tue, 07/07/2015 - 21:17 | 6283003 suteibu
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?

Tue, 07/07/2015 - 22:22 | 6283312 disabledvet
disabledvet's picture

Yes, indeed I have.

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

Tue, 07/07/2015 - 21:09 | 6282979 i_call_you_my_base
i_call_you_my_base's picture

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

Tue, 07/07/2015 - 23:37 | 6283523 Archive_file
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.

Tue, 07/07/2015 - 21:11 | 6282983 ClassicCommodity
ClassicCommodity's picture

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

Tue, 07/07/2015 - 21:11 | 6282984 wendigo
wendigo's picture

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

Tue, 07/07/2015 - 21:15 | 6282990 q99x2
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.

Tue, 07/07/2015 - 21:16 | 6282998 papaswamp
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.

Tue, 07/07/2015 - 21:16 | 6282999 Whoa Dammit
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

http://www.postandcourier.com/article/20150707/PC16/150709558

 

Tue, 07/07/2015 - 21:21 | 6283016 wendigo
wendigo's picture

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

Tue, 07/07/2015 - 21:44 | 6283136 Whoa Dammit
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.

Tue, 07/07/2015 - 21:30 | 6283008 JustObserving
JustObserving's picture
Goldman Sachs Says There’s No China Stock Bubble, Sees 27% Rally

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

Tue, 07/07/2015 - 22:24 | 6283323 disabledvet
disabledvet's picture

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

Tue, 07/07/2015 - 22:57 | 6283420 game theory
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.

Wed, 07/08/2015 - 00:21 | 6283615 biggestbrother
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

Tue, 07/07/2015 - 21:21 | 6283010 Quinvarius
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.

Tue, 07/07/2015 - 21:25 | 6283036 OldPhart
OldPhart's picture

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

Tue, 07/07/2015 - 21:26 | 6283044 papaswamp
papaswamp's picture

How do we distract the people from their losses?

Blame US hackers then launch an attack on the US.

Brilliant!

Tue, 07/07/2015 - 21:36 | 6283094 coast
coast's picture

I guess China helping Greece is off the table?

Tue, 07/07/2015 - 21:40 | 6283116 foxmuldar
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. 

Tue, 07/07/2015 - 22:39 | 6283353 Bush Baby
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

Tue, 07/07/2015 - 21:40 | 6283119 Mini-Me
Mini-Me's picture

When does this shit show finally unravel?

Tue, 07/07/2015 - 21:43 | 6283134 foxmuldar
foxmuldar's picture

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

Tue, 07/07/2015 - 22:28 | 6283331 franzpick
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.

Wed, 07/08/2015 - 06:24 | 6284076 nosam
nosam's picture

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

Tue, 07/07/2015 - 21:46 | 6283149 foxmuldar
foxmuldar's picture

Over 20% of Listed China stocks in trading halt. 

Tue, 07/07/2015 - 21:55 | 6283195 Dathedr
Dathedr's picture

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

Wed, 07/08/2015 - 06:27 | 6283239 Dathedr
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.

Tue, 07/07/2015 - 21:56 | 6283196 enloe creek
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?

Tue, 07/07/2015 - 21:59 | 6283214 umdesch4
Tue, 07/07/2015 - 22:05 | 6283236 buzzsaw99
buzzsaw99's picture

spoken like a true tbtf maggot.

 

Tue, 07/07/2015 - 22:05 | 6283237 Scooby Doo
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!

Tue, 07/07/2015 - 22:06 | 6283245 franzpick
franzpick's picture

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

Tue, 07/07/2015 - 22:06 | 6283246 BoPeople
BoPeople's picture

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

Tue, 07/07/2015 - 22:07 | 6283251 buzzsaw99
buzzsaw99's picture

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.

Tue, 07/07/2015 - 22:08 | 6283260 Chad_the_short_...
Chad_the_short_seller's picture

When does this happen in the USA? Who in the FUCK would want to buy stocks in this market right now?

Tue, 07/07/2015 - 22:08 | 6283261 Chad_the_short_...
Chad_the_short_seller's picture

When does this happen in the USA? Who in the FUCK would want to buy stocks in this market right now?

Tue, 07/07/2015 - 22:11 | 6283274 Rebel yell
Rebel yell's picture

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.

Tue, 07/07/2015 - 22:30 | 6283335 disabledvet
disabledvet's picture

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...

Tue, 07/07/2015 - 22:24 | 6283322 BoPeople
BoPeople's picture

Do you mean "LOSSES" could be in the trillions.

Sheesh, get an f'n editor already!!

Tue, 07/07/2015 - 22:28 | 6283329 RMolineaux
RMolineaux's picture

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.

Tue, 07/07/2015 - 22:34 | 6283345 disabledvet
disabledvet's picture

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...

Tue, 07/07/2015 - 23:03 | 6283438 Jack Burton
Jack Burton's picture

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.

Wed, 07/08/2015 - 03:38 | 6283917 Element
Element's picture

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.

Tue, 07/07/2015 - 23:35 | 6283514 jldpc
jldpc's picture

so simple -- easy come - easy go.

 

Wed, 07/08/2015 - 00:00 | 6283577 TheAntiProgressive
TheAntiProgressive's picture

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.

Wed, 07/08/2015 - 00:08 | 6283594 ersatz007
ersatz007's picture

Fuck...I guess I'm back to selling bananas.

Wed, 07/08/2015 - 00:12 | 6283600 ersatz007
ersatz007's picture

"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...

Wed, 07/08/2015 - 08:07 | 6284331 brokenspoke
brokenspoke's picture

Bet Long on bicycles, tip of the day

 

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