Why China's Stock Collapse Could Lead To Revolution

Tyler Durden's picture

Make no mistake, the bevy of measures put forth by Chinese authorities in an effort to stop a three-week slide in the country’s equity markets collectively trump the QE programs implemented by most DM central banks.

Even if one wanted to argue that the PBoC’s support for CSFC doesn’t amount to outright QE (much as some, Morgan Stanley for instance, claim the LTROs associated with the country’s local debt swap program aren’t effectively QE), “quantitative easing” will never be able to compete with “qualitative arresting” in terms of government heavy-handedness in financial markets. 

All jokes aside though, if the reprieve Chinese stocks have received from Beijing’s crack down on “rumor spreaders,” “hostile” foreign short sellers, and just plain old “sellers” fades starting on Monday (which we suspect it might), the Politburo may indeed be forced to abandon all pretenses that the PBoC isn’t directly monetizing stocks. In other words, China may have to abandon the “there’s no such thing as Chinese QE” line once and for all. With that in mind, consider the following from Credit Suisse, who has more on China’s “Draghi” moment.

First, Credit Suisse takes inventory of the extraordinary lengths China has gone to to stop the bleeding.

When a central bank says “whatever it takes”, we think the market should listen. The US Federal Reserve did so in 2008 and the European Central Bank did so in 2012. Is it the People’s Bank of China’s turn now?

The equity market panic has continued, with the Shanghai Composite Index diving by 32% over the past four weeks and share prices of smaller companies dropping even more. The authorities have launched two rounds of confidence-boosting measures over the past two weekends, neither meeting with much success.

 

The first round of confidence-boosting measures, anchored by cuts in interest rates and stamp duty, failed dramatically, as conventional policies had little impact in stopping the mechanical unwinding of leveraged positions. Over the past weekend, Beijing switched to administrative intervention by banning short selling and suspending IPO processes. State-controlled pension funds and sovereign funds are buying large caps, in an attempt to boost the index. More extraordinarily, the central bank injected liquidity in to the China Securities Finance Corporation Limited (CSFC) to buy stocks, without any pre-set limit in amount or timeline. Still, the measures did not seem enough to stop the market deleveraging and spiraling downward.

Next, the bank takes up an argument we've made quite a few times. Specifically, that the sell-off has implications far beyond the SHCOMP and Shenzhen. First, China is attempting to transition its economy towards a consumption and services-driven model. The sheer number of retail investors that have flooded into Chinese equities this year combined with the severity of the sell-off could very well serve to curtail consumer spending, thus hampering what is already an extremely difficult economic transistion. 

Further, the eye-watering array of backdoor margin lending schemes (umbrellla trusts, structured funds, P2P, etc.) investors have employed in an effort to skirt official leverage restrictions have conspired to create an enormous house of cards which, when it collapses, could imperil the entire financial system.

We identify two major channels via which a sharp market correction could affect the real economy. The first channel is consumption. There are about 258mn stock trading accounts opened on the Shanghai and Shenzhen stock exchanges – 83% of the entire population of the US, with about one-third opened over the past nine months. We note a major shift of household savings from bank accounts to brokerage accounts. We estimate that 80% of China's urban households invest in stocks or equity funds, and equity exposure surged to at least 30% of their liquidity assets, from less than 10% at the beginning of 2014. The wealth effect is clear, but we suspect that the length of the market correction matters more than the depth. The Chinese people have kept hold of their jobs ensuring steady monthly cash flows, but generally they are feeling poorer, particularly in the face of adverse market conditions. Auto sales, which account for 9% of total retail sales, underwent a sharp decline, though not entirely caused by the wealth effect. The situation is too fluid for us to make any attempt to quantify the wealth effect, but we are inclined to believe that should the Shanghai Composite Index drop towards 3000 and stay low, we expect retail sales growth to be flat or decline slightly compared with 10.3% yoy as the average of the past five months, taking away the final growth engine, when investment and exports are all facing structural issues and have already decelerated. 

 

 

The second channel is finance. We estimate that China has about RMB3.7tn in margin financing through brokers' leverage, structured products and equity collateral financing (i.e., companies or big shareholders pledge stock rights to borrow more to invest in the equity market). The actual size of margin financing could be even bigger as we cannot fully estimate underground borrowing and over-the-counter borrowing. Further, some bank credit for real economy investment may have been diverted to the stock market. 

 

Finally, as we said repeatedly over the past several months while watching incredulous as new stock trading account creation hit escape velocity, the collapse of the market has serious implications for social unrest. 

Besides the economic rationale behind making an outsized policy response, political considerations are equally important. China has one of the world's highest retail investor participation rates in the equity market. With the drastic fall in share prices recently, we think social stability is clearly at stake. 

So what is the next step to head off "social instability"?

Outright, Kuroda-esque stock market monetization.

We are inclined to believe that Beijing will escalate policy responses until they start working. We have listed a few options that we believe Beijing may consider, but stress that unconventional measures probably would work better in current market conditions. 

 


 

The central bank [has already] injected liquidity to CSFC to buy stocks, without any pre-set limit in amount or timeline. To some extent, this is the Chinese version of QE. Although PBoC is not buying bonds and not yet expanding its balance sheet aggressively, it is taking non-conventional measures to boost asset prices in order to stop market panic, deleveraging and downward spiral.

 


And because we doubt the situation could be summed up any better, we'll close with what we said on Thursday evening:

"By now it is clear to everyone that what is going on in China is nothing short of the complete collapse of a centrally-planned market into sheer chaos, a bubble which while punctuated by the occasional dead cat bounce, is now finished and it is only a matter of time before all the 'nouveau riche' farmers and grandparents see all their paper profits wiped out and hopefully go silently into that good night without starting mass riots or a revolution."

 


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
JustObserving's picture

The Chinese government will print trillions and support the stock market before it permits a revolution.

The other strategy would be to shut down the stock market for a few days and then announce that all pension funds must allocate at least 30% in the stock market. Shorts will be screwed.

Or announce double tax on short sales profits.

There are so many ways to artificially inflate stock markets.

y3maxx's picture

Outbreak of W W #3 is now a cinch.

China vs Japan

China vs Taiwan

China vs USSA

take your pic

Seek_Truth's picture

Iran and allies vs USA and allies.

FIFY

Took Red Pill's picture

Speaking of which, is this just a coincidence?

http://www.nytimes.com/aponline/2015/07/09/world/ap-us-pacific-islands-disconnected.html?_r=0

 the last time this happened on a large scale, a "cable disconnect" under the ocean. all of iran was cut off. it was "repaired" and iran came back online. Months later, it came out that israel and the u.s. wrecked iran's computer networks.

rccalhoun's picture

china's market has only given up this years gains.  wheres the crash?   propaganda.

silverer's picture

Well, as it goes, the ground level consumers typically move late into the market.  Lots of people were wiped out.

MillionDollarBonus_'s picture

It is an absolute crime that short sellers can literally sell a country's future down the drain. Short selling is nothing but financial terrorism, and it amazes me that it's not banned yet. The stock market is a place where everyone comes to invest their hard earned savings in good quality companies - this helps the country grow, and it provides an extra income for millions of people. What short sellers are doing is abusing this privelage and literally destroying the playing field for everyone else. Short sellers should be tried for high treason and terrorism for what they've done to this country its people!

y3maxx's picture

Agreed MDB.....if bankers and companies weren't corrup from the get go....investing in stocks would be a safe & guaranteed investment.

suteibu's picture

Yes, the Western hand-wringing over China has opened full tap.  It's all the rage in the Western media.

El Oregonian's picture
"China hurtles"

"China Hurls"

 

Fixed

angel_of_joy's picture

It's the Ukrainian scenario applied to the Chinese stock market, this time. It looks more and more like a Western wet dream: collapse China through its stock market. There are two little issues with this concept, as ZH readers would know already:

1) the stock market is not the economy (not in China, and definitely not in US, Japan, UK, or any Western country of choice);

2) there is no stock market anymore, at least in the classical sense of the term. All we have now is the empty shell of a formerly independent institution, under the direct control of its respective central bank.

The Chinese were caught with the guard down this time, but it's not going to happen again. Probably, being so new at the game, they didn't realize that, when all other players are rigging their game, you'll have to rig yours too, or you'll end up as the sucker in the bar who pays for everybody else. Lesson learned, and watch for payback. Incidentally, I find the latest avalanche or ZH articles singing the demise of the Chinese economy, in the last couple of weeks, rather amusing. I'm sure it's totally coincidental, and unrelated to the new ZH ownership... /s

nightwish's picture

Please dont tell me jews bought out ZH. Please dont tell me jews bought out ZH.

angel_of_joy's picture

Always read the small print (this time, located at the very bottom of the page...)

Copyright ©2009-2015 ZeroHedge.com/ABC Media, LTD

Earl Slaughter-- Truck Driver.'s picture

ABC Media LTD isn't American Broadcast Company (ABC)-- it's a London-based advertising agency that's a subsidiary of Retail Market International.

 

Know those pop-ups and banner-ads that are often bitched-about on this site? Well, I'd guess that even the Tyler's have bills to pay, and that ABC Media LTD is their way of doing it.

 

No down-vote from me, as I kinda had a similar fear ("ABC?!? Awww, shiii...") when I saw the fine-print.

Max Steel's picture

This zh article is crap . Typical propaganda . Chinese stocks gained 15p% in just 6 months ofcourse it will come down . Oh and china economy isnt collapsing or exploding in pieces they just need to handle theri credit more Carefully .

rccalhoun's picture

not one your better posts MDB. 

Captain Debtcrash's picture
Captain Debtcrash (not verified) MillionDollarBonus_ Jul 10, 2015 10:39 AM

MDB,

To curtail short-selling is just curtailing property rights.  If I want to lease my stock to get some extra return, with the understanding that the lessee is going to sell it and need to re buy in the future, that is my right as the owner of the stock.  Two entities should be free to make that agreement.  To tell people what they can do with their property is a slippery slope, granted we've been sliding down for a while.  You are the one who is buying the Chinese (like country that blames short selling when their market drops) propaganda hook line and sinker.

Financial terrorism-Central banks manipulating markets up causing a bubble, then when gravity and economic law inevitably cause a crash blaming it on shortsellers!!!  

chunga's picture

It's hard to tell the difference between rights to do business and committing massive fraud because they often look exactly alike.

There's been a bit of a buzz on ZH about the site linked below. I started reading it again, pretty interesting.

http://redefininggod.com/the-rockefeller-plan-for-the-brics-new-world-or...

nightwish's picture

Demonizing short selling is the propaganda of every country that has a market for securities. They need bad guys and scapegoats to finger for the market collapse. Point bonus is making is that if the citizenry would just cooperate, central planning including the banning of short selling can eliminate virtually every problem in the world. 

Captain Debtcrash's picture
Captain Debtcrash (not verified) rccalhoun Jul 10, 2015 10:23 AM

It doesn't matter that the crash thus far only wiped out this years gains, the issue it what it does to the credit markets through margin debt, and investor psychology. How many years of gains did the housing market wipe out, just a few, and same with the dot com bust.  Not to mention half the Chinese stocks are still frozen so half the market still needs to rebalance. 

angel_of_joy's picture

There is no market in "the market", and it hasn't been for years ! What planet have you landed from ? It's all just a very elaborate kabuki play. By the way, how do you translate "kabuki" in Chinese ?

Smiddywesson's picture

If you lose 30% of your portfolio value, you must gain 42.9% back to zero, AND you lose your ability to wax poetic about the definition of a crash.  The CHINESE GOVERNMENT is sure TREATING IT LIKE A CRASH.

maskone909's picture

but but china and russia are care about free market an liberty

goldhedge's picture

@ Captain Debtcrash

 

Have you been ass raped by a ChiCom by any chance?

 

Eyeroller's picture

Iran and allies vs USA and allies.

But doesn't that mean you get USA vs USA? (Ask Lurch Kerry)

silverer's picture

All OK as long as the miitary industrial complex is moving that money.

Seek_Truth's picture

Lol.

Iran has no Rothschild controlled Central Bank, never did, never will.

Ancient Persia destroyed Ancient Babylon.

Modern Persia (Iran) will destroy Modern Babylon the Great (the Global Financial System).

https://www.biblegateway.com/passage/?search=Revelation+17&version=KJV

https://www.biblegateway.com/passage/?search=Revelation%2018&version=KJV

JRev's picture

"No man on earth has less taste or talent for criticism than myself and least and last of all should I undertake to criticise works on the Apocalypse. It is between fifty and sixty years since I read it and I then considered it as merely the ravings of a maniac no more worthy nor capable of explanation than the incoherences of our own nightly dreams.

There is not coherence enough in them to countenance any suite of rational ideas. You will judge therefore from this how impossible I think it that either your explanation or that of any man in the heavens above or on the earth beneath can be a correct one. What has no meaning admits no explanation and pardon me if I say with the candor of friendship that I think your time too valuable and your understanding of too high an order to be wasted on these paralogisms. You will perceive I hope also that I do not consider them as revelations of the Supreme Being whom I would not so far blaspheme as to impute to Him a pretension of revelation couched at the same time in terms which He would know were never to be understood by those to whom they were addressed. In the candor of these observations I hope you will see proofs of the confidence esteem and which I entertain for you."

-Thomas Jefferson on Revelation 

Seek_Truth's picture

In other words, TJ was too stupid, or too distracted by less important things, to take the time and effort required to interpret the most important prophetic work of all time.

TJ wasn't a god, just another man.

History is written by the conquerors.

So take history (and the purported words of "great" men) with a lot of salt.

Your heroes were mere men.

Revelation is the work of the one true God.

JRev's picture

If YHWH, the Caananite God of War is your "One True God," then sure. 

History is indeed written by the conquerors. Like the Roman Flavians and their Talmudic Court Jester, Josephus, who wrote the canonized books of the New Testament. Like the Catholic Church at the Council of Niecea, gutting the Bible of its most powerful allegory after the massacre of the Gnostics. Surely, though, this is not the history to which you refer?

Perhaps you should Seek_Basic_History before you Seek_Truth. It might be best for you to Seek_Help firsthand, as the Predictive Programming that is Revelation (in which all Christians lay down arms and allow Global Serfdom and Death to engulf the Planet) has clearly warped your mind beyond rational countenance. 

You certainly ain't qualified to seek anything without "eyes to see and ears to hear." 

Seek_Truth's picture

Ha!

Is that what they taught you in "alt-historee" class?

Let's dissect your erroneous thought process, shall we?

YHWH was the god of the Canaanites? ROFL! Is that why YHWH ordered Israel to slaughter the Caananites?

"But you shall utterly destroy them, the Hittite and the Amorite, the Canaanite..." - Deuteronomy 20:17

Josephus wrote the New Testament? Is that what your Special Ed teacher taught you?

The distinctive writing styles of the NT books tell otherwise: http://www.bethinking.org/is-the-bible-reliable/the-historicity-of-the-n...

"Like the Catholic Church at the Council of Niecea, gutting the Bible..."

First of all, the "Catholic Church" did not yet exist at the time of Constantine and the Council of Nicea.

Second, the oldest manuscripts and papyrii predate the Council of Nicea by more than 200 years:  http://www.dts.edu/read/wallace-new-testament-manscript-first-century/ 

And all are in agreement with one another. The standard practice is to ensure that modern translations adhere to these earliest copies of the papyrii. We therefore know that they are faithful replications of what occurred in the first century.

http://www.bible.ca/ef/topical-the-earliest-new-testament-manuscripts.htm

https://carm.org/manuscript-evidence

"in which all Christians lay down arms and allow Global Serfdom and Death to engulf the Planet"

Finally, Revelation does not teach what you think it does. That would be due to your hero worship, which blinds your mind to the best use of your time while here on Earth in your temporal state. What Revelation describes is exactly the state of affairs we find ourselves in: A Beastly government, ridden by a power behind the throne (the Global Financial System), both of which are soon to be destroyed, after which Christ returns to judge all humankind, punish the wicked, and reward the righteous.

You now have my permission to get of your knees, and stop bowing to that idol of TJ, and the rest of the mere men you worship.

The truth shall set you free.


JRev's picture

So many strawmen and red herrings here it makes it difficult to respond, lest I waste too much of my time playing with you. Your statements about the origins of the Roman Catholic Church are patently absurd, as the political entity was established within a century of the supposed death of Christ. Or have you written the Apostles and Saint Peter out of your canon entirely? 

It's also not good form to cite the work you're defending in the defense of the work itself. That's why you need multiple primary sources in attempting to validate Truth. But that's part of the Scientific Method, refined during the Enlightenment, whose greatest minds you have already said in so many words were "wasting their time." 

Don't believe I said anything about the age of any given book, either. Some are much older than others. The story of the Son (Sun) has been told many, many times before, after all. I merely stated that books like the Gospel of Thomas and the Book of Enoch were utterly purged from Biblical study, and their contents refute Revelation as any kind of Prophecy. Have you read them? If not, why did you let a small group of MEN decide what was and was not "Holy Writ?" Is Constantine your God?

Are you aware of the historical continuity between the Pentecostal movement and the English Church, who are almost single-handedly responsible for reviving belief in Revelation throughout Christianity? Have you looked at any citation regarding the modification of the New Testament by Josephus? Are you aware that all the Trinity religions have historical lineage to polytheistic, astrotheological tomfuckery? Do you have ANY idea what the numerology contained in Revelation ACTUALLY MEANS? 

I don't worship men or fictitious sky-daddies. Somewhat hypocritical that you criticize myself for hero worship, only to bow before the primary archetype of the Hero myth, the Christ figure. Regardless, you will find yourself in the same position as the Millerites of the mid-1800s or the Christians of Nazi Germany, both utterly convinced they were living in the End of Days, both utterly unspared the fate before them in the face of ignorance. 

Have you considered Mormonism? At least then your Pascal's Wager would be assured, as you'd already be living in the End Times (supposedly). Have a nice afterlife, as you seem intent on pissing this one away on shit you don't fully understand.

Seek_Truth's picture

Not a single strawman, red herring, nor any other logical fallacy in my reply. I proved, point by point, that you are in error. Rather than accept that you have been corrected, you lash out with even more erroneous assumptions.

The claims of the Catholic Church being founded by Peter are self aggrandizing horse manure. There is nothing further from the truth. The Roman Church founded by Constantine (circa 300 AD) is the Apostate Church that was foretold in 2 Thessalonians 2:3-15 (https://www.biblegateway.com/passage/?search=2+Thessalonians+2&version=KJV), as the “Son of Perdition.” It was this Apostate Roman Church, (~700 years later) that gave birth to both the Orthodox Church and the Catholic Church in the Great Schism in 1054 AD.

There are multiple sources of papyrii and other manuscripts (thousands) that confirm that the original text of the 1st Century was accurately maintained, using the scientific method. The internal consistency of the New Testament documents is about 99.5% textually pure.  That is an amazing accuracy.  In addition, there are over 19,000 copies in the Syriac, Latin, Coptic, and Aramaic languages.  The total supporting New Testament manuscript base is over 24,000. https://carm.org/manuscript-evidence

There is no ambiguity what the Bible teaches about the SON of God, which is obviously not to be confused with the sun. The “gospel” of Thomas (https://carm.org/does-the-gospel-of-thomas-belong-in-the-new-testament) and the book of Enoch (http://www.neverthirsty.org/pp/corner/read2/r00810.html) are not part of the Biblical Canon for good reason. I have read them both, and it is obvious that they do NOT belong in the Bible Canon. https://www.biblegateway.com/resources/asbury-bible-commentary/Canon-Scripture

The book of Revelation is part of the Bible Canon, therefore, “belief” in Revelation goes hand in hand with belief in the entire Bible, so there goes your theory on the “Pentecostal movement and the English Church.” Likewise, your completely unfounded and ridiculous hearsay regarding Josephus somehow rewriting hundreds of fragments and whole or nearly whole papyrii is 100% fail. As far as “Trinity Religions” go, that is a teaching of the Roman Church, and her daughters, the Orthodox and Catholic Churches, and their descendants. The Bible Teaches otherwise- true Monotheism: YHWH the Father, Jesus Christ His only-begotten Son TWO separate beings. The Holy Spirit does not have a name, nor is it ever spoken of as a person. This is what the Bible teaches- and what Justin Martyr, the earliest “church father” (circa 100 AD) taught. And yes, the numerology in Revelation and other prophetic books in the Bible has a clear meaning. In fact, it is 666 that is easily understood once one recognizes both the meaning of “6” and the reference to 1 Kings 10:14 and 2 Chronicles 9:13: https://www.biblegateway.com/passage/?search=2+Chronicles+9%3A13-28&version=ESV

Christ is the son of the living God- as such He deserves worship and praise, unlike mere mortal “heroes.” Your quote from TJ up thread proves that you look to him as an authority figure, his words beyond reproach, which proves your assertion that you do not engage in hero worship false.

We all place our bets- I believe we are in the end times for good reason- all the signs are being fulfilled, and ZH does a great job of pointing that out frequently. How you can miss that while reading ZH shows just how blind and disconnected from reality you are. “Hypocrites! You know how to interpret the appearance of the earth and the sky. How is it that you don't know how to interpret this present time?” – Luke 12:56 

You assume much about what I do, and do not, understand. That makes you a fool. I do not assume what you know and do not know- that is the course of wisdom.

For by your words you will be acquitted, and by your words you will be condemned." – Matthew 12:37

 

Smegley Wanxalot's picture

Iran would first have to get a nuke, but the joke's on them: Barry and Kerry said they aint gonna let that happen.  

 

And we all know what smart negotiators Barry and Kerry are.

SoilMyselfRotten's picture

So, if the farmers and grandparents will lose all their money, to whom will they lose it? Is the Squid in there?

Ghordius's picture

money? it's not money they lose. hell, it's not even currency

when a stock market goes down, what is lost is first the "unrealized gains" made on the valuation of those stocks you hold based on the last trades and prices

and then, the margin calls kick in, at which point you might lose collateral or guarantees, which then can lead to repossessions

(then many can't even understand that they were buying with leverage, or what this really means)

in short: what is often called "paper wealth", or financial wealth

even shorter: what farmers lose is usually their farms

Smiddywesson's picture

Yes.  The losers lose their dreams and delusions, unrealized gains, and a portion of their money, unless they used leverage, then they lose it all.  Where does the real money go?  To the smart people hedged or who took it off table.  Where does the rest go?  Up in smoke like all lost dreams, because it wasn't real.

Bay Area Guy's picture

Disagree if China has Cultural Revolution #2, as implied by the article. If they do, they revert to insignificance on the global stage because they'll be too busy purging everything internally. WW3, if it happens, is going to have some strange bedfellows based on whatever the powder keg is.

Oldwood's picture

Anecdotally it appears to me that those who lose "something for nothing" are much more apt to violently react than those who lost hard won earnings. It seems backwards at first glance but I really think it makes sense.

People who work for a living might lose their assets but also recognize that the way they got it still remains...through their hard labor, so they still believe they can earn more.

For those who won it, who got it for no work, those people realize that it may never happen again, and further it is not the result of their actions but others. It firmly reminds them of their dependency and while everyone enjoys the fruits of dependency, no one like FEELING dependent. And FEELINGS drive violence, not rationality.

disabledvet's picture

Too true.

The collapse in 1929 in the USA was NINETY percent.

And of course we all remember the great violence that erupted as a consequence and how we supported Hitler all the way to the end.

TheReplacement's picture

So you think they've (TPTB) have kept the Korea situation status quo this long for giggles?  Proxy wars are a great way to extend credit and juice manufacturing.

Fahque Imuhnutjahb's picture

...or announce that all proceeds from short selling are to paid in Pb, high velocity Pb--the true "Fast Money"

Antifaschistische's picture

any government, or central planner...has only one option when it comes to buying "stuff".  That option, is to pay higher than market rates.

So when a central planner (e.g. FED buying GOV debt) steps in to buy at higher than market rates what they do is PROVIDE the incentive for others to SELL!!!   which is opposite of what they really want, which is for security holders to actually buy and HOLD those securities.

So...just one more example of government intervention stimulating contrary responses to desires.

NihilistZero's picture

The Chinese government will print trillions and support the stock market before it permits a revolution.  ...There are so many ways to artificially inflate stock markets.

And all those ways have costs that will ultimately come to bear on those who would spark the revolution anyway.  PRc can pick it's poison, but you can't have a centrally managed economy where everyone is happy with their wealth and freedoms.  The poles may keep their "paper wealth" but their standard of living will go down just as Abenomics has done to their Japanease neighbors.  It will then likely be a choice of reforms or war.  I sincerely hope the PRC does not instigate the latter.

TheReplacement's picture

War is the distraction.

Being able to blame "capitalism" is priceless.

Is part of plan round eye.

Grimaldus's picture

"The Chinese government will kill millions before it permits a revolution."

Fixed it for ya JO.

Grimaldus