This page has been archived and commenting is disabled.

5 Things To Ponder: "China Rising" Or Not?

Tyler Durden's picture




 

Submitted by Lance Roberts via STA Wealth Management,

Things have certainly changed since I was a child. When I was growing up my father would come outside to give the traditional "dinner whistle." As was often the case, the common response was "Can we play for five more minutes? Please?"

Times have certainly changed. Today, my "dinner whistle" is often met with:

"Coming, just let me get to save point."

My kids are huge fans of the Electronic Arts "Battlefield" series of multiplayer military warfare games. The other night, one of the downloadable content (DLC) maps on which they were playing caught my attention. It was entitled "China Rising."

Had it not been for the recent headlines of the Shanghai index, it would have likely gone unnoticed. However, given the collapse in the index of nearly 30% over the last month, and the potential implications for domestic economy and markets, I thought it was most apropos.

China Rising? Well, it was. And this last week, we saw what the perils of a leveraged market can be when things go "inevitably wrong."

"The perils of margin debt should not be readily dismissed. For a real time example of financial market leverage and consequences, one needs to look no further than the Shangai Index in China. That market is in a complete collapse as plunging prices are forcing investors to sell shares. While the Chinese government has injected liquidity, suspended trading in almost half of the listed equities and encouraged pension funds to buy securities, these actions have done little to stem the decline as investors "panic sell" in a rush to safety. That collapse, if history is any guide, is likely not done as shown in the chart below."

China-Index-070815

"Also, notice the correlation between peaks in the Shanghai Index and the S&P 500. According to a recent Bloomberg article, margin debt in China reached $264 Billion in April of this year. After adjusting for the size of the two markets, is about double that of the roughly $500 billion in margin debt in the U.S.

 

This difference in relative size was given as a prime example about how margin debt is not a problem for the U.S. However, the relative size of margin debt in the past has not been a "safety net" that investors should rely on. As shown, the level of real (inflation adjusted) margin debt as a percentage of real GDP has reached levels only witnessed at the peaks of the last two financial bubble peaks in the U.S."

Margin-Debt-GDP-070815

"While no single indicator should be relied upon as a measure to manage a portfolio, it should be well understood by now that leverage is a "double-edged sword." While rising margin debt levels provide the additional liquidity to drive stock prices higher on the way up, it also cuts deeply as prices fall."

This weekend's reading list is a collection of analysis as to the potential impact of the deflating of the Chinese bubble. Will the interventions by the Chinese government stem the tide of selling or only postpone it? More importantly, is history set to repeat itself. "China Rising" may have been the sound of the "sound of the bell" being rung for the bull market that begin in 2009. While it is too early to know for certain, at least things are getting a bit more interesting. Let's just try and get to a "save point" first.


1) The Greek Crisis Is Nothing Compared To China by Paul La Monica via CNN Money

"Why does this matter to people outside of China? A rapidly sinking stock market is often a sign of an economy in turmoil. Remember 2008? And 2000?

 

Since China is the second largest trading partner for both Europe and the United States, it goes without saying that a healthy Chinese economy is good news for the developed world. All that talk about the possibility of Greek contagion if it is forced to drop the euro and bring back the drachma? That seems overdone too.

 

Economists at the Royal Bank of Scotland tweeted out a chart last week that showed that U.S. banks have nearly ten times as much exposure to China than Greece."

China-Stocks-Greece-070915

Read Also: Goldman Sachs Says There's No China Stock Bubble by Cindy Wang via Bloomberg Business

2) Why Beijing Cannot Let Its Bull Market Die by Craig Stephen via MarketWatch

"So this takes us to the current point where controlling the market has been elevated to a test of strength for Beijing and its state-led model.

 

In China, it shouldn't be too much of a stretch to believe that the government has the ability to control stock prices through force of will. Beijing has a long history of being able to bend market forces to meet its ends — from interest rates, currency values and the movement of capital in its captive financial system.

 

But as shares continue to slide regardless of government action, investors are increasingly not buying the government line and, more ominously for President Xi Jinping, they are less willing to believe that he and the party are indeed all-powerful.

 

To get a sense of what the wider fallout from a correction could be, it helps to compare China now to its previous equity boom-and-bust in 2007."

Read Also: Why This Chinese Bubble Is Different by John Authers via FT

Read Also: 5 Reasons Why China Really Matters by Mohammed El-Erian via Bloomberg

3) China's Big Misquided Gamble On Its Stock Market by Minxin Pei via Fortune

"In real market economies, stock crashes of such magnitude may cause heartburn but unlikely precipitate frenzied government efforts to prop up equity prices. But China is, as we know, not exactly a market economy and has a government that acts differently. In response to the latest crash, instead of allowing market forces to self-correct, Beijing is rolling out aggressive measures to keep the bubble from popping completely.

 

Beijing should be building social safety nets and recapitalizing its banks, not betting the house on a stock market bubble."

Read Also: China And The Delusion Of Control by David Keohane via FT

China-Margin-Risk-070915

4) China Or Grexit? What's Driving Markets by Bryce Coward via GaveKal Capital

"While some of the post Greferendum moves in financial markets could have been and were predicted by the financial punditry – lower euro, lower stocks, lower US bond yields, higher gold – the real moves have appeared elsewhere. Indeed, as of this writing the euro is only lower against the USD by less than .5%, the MSCI World Index is barely off by 1%, bonds are bid, but not emphatically, and gold is only marginally higher.

 

The real moves have been in oil (WTI down 6.3% and Brent down 5%) and copper (down 3.9%). While at first glance this may strike one as odd, there could be something larger at work. Perhaps the more important catalyst for asset price changes of late is Chinese economic slowing rather than fears of Grexit?"

Gave-Kal-China-070915

Read Also: US Stocks: Last Man Standing by Meb Faber via Faber Research

5) China's Stock Market Crash Is Just Beginning by Howard Gold via MarketWatch

"As I've written many times, China, Brazil, Russia and other emerging markets are suffering through secular bear markets that will last years. Since Chinese stocks represent more than 20% of some emerging-markets ETFs, the pain will likely continue well into this decade.

 

Secular bear markets feature sudden, violent rallies and mini–bull markets that fool people into thinking they're the genuine article. In real bull markets, indexes repeatedly top their previous highs; in bear markets, they never do."

Read Also:  Chinese Stocks: What's Behind The Great Market Tumble? by Knowledge@Wharton


Other Interesting Reads

Why Momentum Investing Works by Ben Carlson via Wealth Of Common Sense

Cyclical Bull, Structural Bear Still by Eric Bush via GaveKal Capital

Old Economic Thinking Is The Problem, Says BIS by Yves Smith via Naked Capitalism


"????(nan dé hú tu) - Where ignorance is bliss, it's folly to be wise." - old Chinese proverb.

Have a great weekend.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Fri, 07/10/2015 - 17:05 | 6297072 Squid Viscous
Squid Viscous's picture

Dead Cat Kung Pao! Yum Yum.

Fri, 07/10/2015 - 17:25 | 6297147 two hoots
two hoots's picture

China will rise.  Peacefully or not, they will rise.  They have people, resources and will not let some paper thing called money or western rules get in their way if they choose a different path.  

Fri, 07/10/2015 - 17:41 | 6297225 Thought Processor
Thought Processor's picture

 

 

Long term I agree completely.  Spent enough time there to know that they are and will be an unstoppable force.

 

Short term, stick a fork in it.  They're sledding off the backside now.  They might be able to delay the coming washout but they will not be able to avoid it.  

Fri, 07/10/2015 - 17:49 | 6297255 Thought Processor
Thought Processor's picture

 

 

I should add as a side bar that I view the U.S. as an immovable object in the region, with its historical fingers deeply planted in the countries around China (except Russia).  

So this will be the unstoppable force meeting the immovable object.  At least at some point in the future, conflict is almost certain.

Sat, 07/11/2015 - 04:55 | 6298563 AChinese
AChinese's picture

Just want to remind you that US burned trillions of dollars on/around Iraq with basically no outcome.  I doubt US wants to use force with China.

Sat, 07/11/2015 - 08:42 | 6298738 Lady Jessica
Lady Jessica's picture

Au contraire.

The US economy was kept from its otherwise inevitable demise, hyper-Krugman style.

Fri, 07/10/2015 - 17:56 | 6297290 centerline
centerline's picture

Resources?  Not enough.  China is a net importer of food, water, and oil.  And what they have (including imports) is dependent on functioning systems (just like in the US, Europe, etc.) including global trade.

If any player had the clear upper hand, it would be on the table.

Fri, 07/10/2015 - 17:09 | 6297096 BoPeople
BoPeople's picture

What I want to know is after the international banks tried to crash the China stocks markets did they have involvement in sending the typhoon directly at Shanghai.

Weather weapons as well as financial weapons are all part of the current technology.

Fri, 07/10/2015 - 17:28 | 6297171 Latitude25
Latitude25's picture

Maybe yes to the market crash.  Definitely a no to causing typhoons.  That's an incredible fairytale.

Fri, 07/10/2015 - 22:54 | 6298120 old naughty
old naughty's picture

Bo, they - you mean masters behind international banks, no?

Fri, 07/10/2015 - 17:09 | 6297098 Motorhead
Motorhead's picture

The South (China) will rise again!!

Fri, 07/10/2015 - 17:22 | 6297145 Squid Viscous
Squid Viscous's picture

Charlie Daniels called it!

'cept he got the skin color wrong...

Fri, 07/10/2015 - 17:18 | 6297133 Latitude25
Latitude25's picture

Despite all the ZH hot air about crashing China I think that they have a handle on totalitarianism, in addition to lots of experience with paper money since they invented it.  I think they will pull through this better than most westerners think with a huge pile of AU.

Fri, 07/10/2015 - 21:06 | 6297801 Dindu Nuffins
Dindu Nuffins's picture

As for AU, with $15 trillion worth of China bank lending having already been spent in commodities over the past seven years to spike everything from copper to gold, those prices aren't going up anytime soon, unless Chinamen get their hands on an equal influx of lending in the future, too. Only Chinamen and their glut of credit made it so expensive in the first place.

When Buyer #1 of the yellow metal is liquidating and trying to sell it back en masse, no one will support its present price level. Hard truth. 

Fri, 07/10/2015 - 17:22 | 6297143 Soul Glow
Soul Glow's picture

China will crash just as hard as any Nation-State when the fiat derivative bubble pops.

Fri, 07/10/2015 - 17:43 | 6297236 centerline
centerline's picture

+1.  The counterparty exposure is global.  Armstrong (Martin) talks about the wealth of a nation being the productive capacity of it's people.  He is right.  But fails to add in that those people need to have food, water, energy, etc.  Remind me again how much China has to import to keep the peasants from revolting? Yeah... they are heading into the shitter as well. 

Fri, 07/10/2015 - 17:28 | 6297174 FreeShitter
FreeShitter's picture

China bans and arrest short sellers....   #winning like charlie sheen.

Fri, 07/10/2015 - 17:39 | 6297217 Chuck Knoblauch
Chuck Knoblauch's picture

The only scum shorting China are western banks.

Fri, 07/10/2015 - 18:13 | 6297346 Dindu Nuffins
Dindu Nuffins's picture

Who aren't even allowed to trade A-shares. Brilliant hypothesis, retard.

Fri, 07/10/2015 - 21:40 | 6297938 bid the soldier...
bid the soldiers shoot's picture

The Chinese learned plenty from the Westerrn induced bubble in Japan in the late 80's.  Dude.

Oh yeah, you were born 10 years later.

Fri, 07/10/2015 - 17:39 | 6297218 bluez
bluez's picture

 

Again: "Nations with industry, specifically with strong and diverse domestic potential productionality will win. Those with weak and fragmentary domestic potential productionality will lose."

China, Russia, and the U.S.A. have completely different economic systems. I think Russia is in a relatively very stable condition, and is basically vulnerable only to the possibility of not being able to sell gas to Europe. But They could survive that.

Terrifyingly, the U.S.A. seems to have nothing but food to sell, and California, which accounts for ½ of said food, is turning into a dust bowl. Thanks to the clever folks who run our “system” we now have very weak and fragmentary domestic potential productionality. We are actually the worst off, and our social perspective is based on competition, with almost no cooperation. So if things go south, we will not handle it at all well.

China now has strong and diverse domestic potential productionality, which our stupid “leaders handed to them. So they can make things for themselves, even if their economy drops very low. They made vast “sovereign wealth” by letting us become their debtors, although I don't see how we can ever pay it back. China and Russia are used to times of adversity but most of us are not. It's time for us to be worrying about our own situation.

Fri, 07/10/2015 - 17:49 | 6297270 centerline
centerline's picture

I would wager that Russia is much more resilient.  China, not as much as a result of lack of resources.  If things really go to hell, Russia is likely better suited to remain intact and bounce back.  In the end, it is all about resources.  Food, water, and oil.  Everything else is layered on top. 

Fri, 07/10/2015 - 18:11 | 6297343 MASTER OF UNIVERSE
MASTER OF UNIVERSE's picture

[Fear of the Lord is the beginning of wisdom.] Old Christian proverb King James Bible.

Fri, 07/10/2015 - 21:36 | 6297924 bid the soldier...
bid the soldiers shoot's picture

it's also the beginning of a lot of psychosomatic ailments.

Fri, 07/10/2015 - 18:16 | 6297360 scubapro
scubapro's picture

Securities Based lending aka SBL or PLA loans are estimated to exceed $400billion currently and ALL the brokerages are pushing this product like no tommorrow---and there may not be one.    Every minor BD is now offering these products.

Margin debt is tracked, SBL loans are not.     The chart above indicates Margin debt at 2.75% of gdp, based on 17T thats about $450billion of margin debt.     Add in another 300B of SBL loans (driving the high end real estate mkt).....the leverage against the stock market is more like 4% of gdp, higher that China.

Currently, finra is 'watching' this.  We will know the jig is up when they 'act' to stem it, as the horse will be out of the barn, as is the custom of any govt or regualtory body.

 

the first 12% decline will be slow/'normal'....then next 20% will occur over a period of days as both margin and SBL calls come in.

if i had the coin, i would be rolling 90 forward puts 10% otm  until the rain comes.

Fri, 07/10/2015 - 18:39 | 6297416 reader2010
reader2010's picture

According to Wiki, The Box Rebellions between 1899 and 1901 made the European great powers finally cease their ambitions of colonizing China because they had learned from it that "The best way to deal with China was through the ruling dynasty, rather than directly with the Chinese people."

If you view history under this light, you can suddenly realize why Stalin bankrolled Chiang Kai-Shek's North Expeditions to rid of the northern Chinese warlords because of their anti-USSR practices, and that also explained why the Zionist bankers along with Rockefellers and Morgans installed Mao (largely thanks again to Stalin) by kicking Chiang out of China. In a sense, the CCP simply serves their master's best interest while tries its best to preserve its own privileges and rule in China in a brand-new narrative of To-Get-Rich-Is-Glorious.

China will continue to rise according to the design, of course.

Fri, 07/10/2015 - 18:47 | 6297435 machop
machop's picture

Broken record.

ZH, go back search your old posts for last 5 years, see how many times you bashed China. Strangely enough China is still #2 and is on its way to overtake US. Thanks to your political heroes.

 

Fri, 07/10/2015 - 18:49 | 6297438 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

Simple indigestion problems with eating Dead Bounced Cat, take a Zantac and it'll probably go down. But if it persists then see your Doctor.

Sat, 07/11/2015 - 03:05 | 6298496 bid the soldier...
bid the soldiers shoot's picture

I have no problem with Peking Duck.   Or should I say Beijing Duck? 

Fri, 07/10/2015 - 21:32 | 6297911 bid the soldier...
bid the soldiers shoot's picture

What turmoil, dude?

"A rapidly sinking stock market is often a sign of an economy in turmoil. 

From its low in 2009, our market tripled in price in a few short years.  That was after $100 trillion in subprime mortgages went sour.  We just printed a lot of money and bought them back at par.

 

China has printing presses too.

Fri, 07/10/2015 - 21:59 | 6297986 theyjustcantstop
theyjustcantstop's picture

chinas govt. acts different, stops trading on some stocks, americas markets are never down, china needs to recapitalize thier banks thats what american trsy's are for, lets drop trou , and sees who gold holdings are bigger, lets compare manufacturing, employment, 90,000,000 lees ebt cards to print out mounthly. and true gdp.

 

Fri, 07/10/2015 - 22:01 | 6297993 Bitcoin Meiser
Bitcoin Meiser's picture

The only ones who would invest in a market that is not free are the ones who believe and fully support the existence of a ponzi scheme, people with no scruples who are willing to play along with a big lie for the sake of profit at the expense of the ignorant.

Do NOT follow this link or you will be banned from the site!