China Just Created A Half-A-Trillion "Plunge Protection" Frankenstein

Tyler Durden's picture

About a month ago, China ran into a small problem. 

The country’s "world-beating" equity bubble - which has served as a wonderful distraction from China’s decelerating economy and bursting property bubble - suddenly collapsed. 

Starting earlier this year and accelerating into June when the CDSC channelled its inner Ronald McDonald and cancelled the series, data out of China suggested that semi-literate farmers, housewives, and famously, banana vendors, were opening millions of new stock trading accounts each and every month.

Subsequently, analysts began to take a hard look at margin lending, which eventually rose to CNY2.2 trillion and touched a record 18% of the SHCOMP free float market cap on July 3.

For the entire Chinese equity market, the margin lending as a percentage of free float figure was near 14% recently, and as you can see from the following, that is quite remarkable when compared to the US and Japan:

While that level of leverage is rather frightening in and of itself, the truly scary part of the story is that it only reflected the positions of traders who were ostensibly more sophisticated (if one can equate account balances with sophistication). That is, brokerages were only allowed to facilitate margin trading for investors whose account balances totalled at least CNY500K, and even then, traders could only lever up 2X. Behind the scenes however, a remarkable shadow margin lending system was thriving, as the country’s newly-minted day traders searched for ways around official margin restrictions.

Backdoor margin facilities included, famously, umbrella trusts and structured funds. Umbrella trusts were set up like a CDO. The senior tranches were marketed to depositors who were promised a fixed coupon - what they were not always aware of, was that their cash was then used to finance margin trading in the lower tranches. In short, depositors were sold a fixed income product that wasn’t a fixed income product. 

The important point is that these backdoor margin channels funneled another CNY1 trillion into Chinese stocks and in April, China cracked down on brokerages’ ability to tap umbrella trusts - some now suggest restrictions on the shadow banking complex’s ability to finance leveraged equity trading was the beginning of the end for the equity mania. 

Once the meltdown entered its second week, China scrambled to prop up the market, unleashing an eye-watering array of stimulus and support measures including rate cuts, liquidity injections, and, most famously, selling bans which stopped just short of threatening to execute anyone found to be engaged in "malicious" activities. 

So far, none of the measures have provided a sustainable solution and now, traders around the world watch the China open as though it were a SpaceX rocket launch - that is, there will be ignition, the only question is whether it will be in orbit in five minutes or whether it will explode in mid-air. 

And while everyone focuses on the admittedly hilarious idea that the Chinese government may actually prosecute bears, the only real way to support stocks when halting half the market and making it illegal for major shareholders to sell has failed, is to go full-Kuroda, which is effectively what the PBoC did when it announced it would provide funding for China Securities Finance. 

As a reminder, two weeks ago the PBoC said it was set to inject capital into China Securities Finance Corp., which is effectively a subsidiary of the China Securities Regulatory Commission. "China’s central bank is now underwriting brokerages’ margin lending businesses," we said, before driving the point home with this: "The PBoC is now in the business of financing leveraged stock buying."

Since then, the plunge protection funds channeled through the CSF have ballooned and on Friday, China’s commercial banks agreed to lend another CNY209 billion to the margin finance vehicle. Here’s Reuters:

China's biggest banks have lent 1.3 trillion yuan ($209.4 billion) to the country's state-backed margin lender to halt a meltdown in Chinese shares, local media said on Friday, underlining the government's determination to support stock prices.


Financial magazine Caijing cited unnamed sources as saying that 17 commercial Chinese banks had coughed up the cash for China Securities Finance Corp as of Monday, after China's central bank said it wanted to extend funding to the firm.


China Merchants Bank Co was the biggest financier, lending 186 billion yuan to China Securities Finance, Caijing said.


China Securities Finance is the only institution that provides margin financing loan services to Chinese securities firms, and is seen as an important conduit for the government to counter stock market volatility.

And Bloomberg has more on just how large the CSF plunge protection project has become:

China has created what amounts to a state-run margin trader with $483 billion of firepower, its latest effort to end a stock-market rout that threatens to drag down economic growth and erode confidence in President Xi Jinping’s government.



China Securities Finance Corp. can access as much as 3 trillion yuan of borrowed funds from sources including the central bank and commercial lenders, according to people familiar with the matter. The money may be used to buy shares and provide liquidity to brokerages, the people said, asking not to be named because the information wasn’t public.


While it’s unclear how much CSF will ultimately deploy into China’s $6.6 trillion equity market, the financing is up to 25 times bigger than the market support fund started by Chinese brokerages earlier this month. That’s probably enough to restore confidence among China’s 90 million individual investors, says Bocom International Holdings Co. The Shanghai Composite Index jumped 3.5 percent on Friday, capping a two-week rally that’s turned it into one of the world’s best-performing equity gauges.


CSF, founded in 2011 to provide funding to the margin-trading businesses of Chinese brokerages, has transformed into one of the key government vehicles to combat a 32 percent selloff in the Shanghai Composite from mid-June through July 8.


At 3 trillion yuan, its funding would be about five times bigger than the new proposed bailout for Greece and exceed China’s 2.3 trillion yuan of regulated margin financing during the height of the stock-market boom last month.

It would be impossible to overstate the significance of the latter point there. If it chooses, China's state-controlled margin lender has the capacity to fund five Greek bailouts worth of leveraged stock buying through Chinese brokerages. 

More poignantly, the CSF has enough funding to double the margin loan balance that existed in the market at its peak and that includes all of margin loans that were extended through China's network of backdoor lending channels.  

Why is it necessary for China to create a half-trillion dollar state-controlled margin trading Frankenstein?

Two words: social stability (more here). Because the psychological effects of watching trillions in margin-fueled paper gains vanish into thin air are hard to predict, and just about the last thing China needs as it tries to transition its economy into a services and consumer-driven model is a popular uprising.

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Troy Ounce's picture


There exitsts a social contract between the Chinese State and its people.

The State provides jobs.

The people keep their mouth shut.

Breaking this contract has its consequences.


y3maxx's picture

This is China's answer to the USSA's QE

hedgeless_horseman's picture



China has created what amounts to a state-run margin trader with $483 billion of firepower, its latest effort to end a stock-market rout that threatens to drag down economic growth and erode confidence in President Xi Jinping’s government.

Bry The Frucking Dip You Frucking Comrades!

Pinto Currency's picture



The comment was made by an analyst in an article here at ZH last week that if the Chinese gov is buying, $20 billion would hold the market for ~ 2 hours.

$500 billion will thus hold the markets for 50 hours.

Cthonic's picture

Sometimes the people just need time to chillax.  Like in February and March of '30.

Quinvarius's picture

If the Chinse gov wants stocks to go up, they will go up.  They have the same printing press we do.  Any other analysis is hogwash.  The professional US hedgefund dipshits were saying to short China before it ramped.  They say the same now.  They don't have any better insight into what the Chinese government wants than anyone else. Look at the Yuan.  It is in complete lockdown mode vs the USD since April while the US harpies have been screaming about a Yuan crash.  The Chinese have complete control of their markets, just like the US.

hedgeless_horseman's picture



"All stock market rallies grow out of the barrel of a gun."


headhunt's picture

Close "Political power grow out of the barrel of a gun"

hedgeless_horseman's picture





Are you really that fucking stupid, or just a Chinese bot, that is totally ignorant of parody?

Bring back the CAPTCHA!

RabbitOne's picture

New Quote I did “…All failed governments using political power to grow stock markets from the barrel of a gun …eventually face the barrels of guns from their constitutions (voters)…”

KnuckleDragger-X's picture

The majority of the stocks aren't trading and the government is demanding the brokerages buy and shoving 'loans' down their throats to do it. This is entirely sustainable forever and ever......

Bush Baby's picture

They should just buy the whole thing, get it over already!

KnuckleDragger-X's picture

They don't want to imitate the Japanese.....

TheReplacement's picture

Shut up you face.  You give away plan.  Shut up you face.

Spitzer's picture

Hopefully China keeps selling treasuries to replace the capital flight out of the country.Thats what reserves are for. Especially if you don't believe in markets.

So the worse China gets, the worse the US will get. All these seppo's getting all high and mighty about China lol. They are your CREDITOR my friends. Your other creditor is monetizing 100% of its own debt. Which one of you 3 are the biggest fuck-up ill never know.

headhunt's picture

They love the income from those reserves and will not sell unless dam breaks

The Ingenious Gentleman's picture

Foreign exchange reserves are not wealth. The central bank loses money on them (unless they rise in value) because it had to borrow local currency and use those borrowings to buy the foreign currency.  

Luau's picture

Countries aren't people, so I'll never understand why terms like debtor and creditor are bandied about as if the roles they assume relate to the roles people assume in those same situations.

TheReplacement's picture

It all depends on how much debt/credit is on the line - who faces the greater risk.  That and nukes.  Nukes are worth a point or two.

Maplehood's picture

This is so retarded

Dr. Engali's picture

The Chinese have learned quickly from the central planners of the U.S.S.A.

youngman's picture

And I see this..and watch gold and silver going does not make sense...seems like everyone loves the casino

Ceomegaglobalcorp's picture
Ceomegaglobalcorp (not verified) youngman Jul 17, 2015 10:11 AM

Seems like everyone was born in a fiat regime and has no concept of sound money. I have no idea how the loss of confidence in fiat occurs when fiat is all the vast majority have ever known and it is extrememly hard for the vast majority to come by. Hyperinflation will be the result of greedy producers, in their minds.

TheReplacement's picture

You've been on ZH almost 2x as long as me and you still look at the situation like it is naturally (market driven) rational?  Dude, we could be witnessing the last days and you are thinking gold and silver going down does not make sense.  I know you are on the right side of this but, with all due respect, really?

Gold and silver going up means things have officially gotten worse and it probably won't benefit most of us either way.  You should be thinking about what you plan to eat after you run out of catfood and cat.  Remember, try to maintain a balanced diet.

JustObserving's picture

How big is the American frankenstein controlling US markets and levitating stocks higher and gold lower? 

joego1's picture

It's more like a zombie squidenstien. It's different this time.

joego1's picture

True price discover commie style. The state controls the price.

gatorengineer's picture

Hows that different from here?

headhunt's picture

Our eyes are round theirs are not

TheReplacement's picture

And the people find it is not worth the price they have agreed to pay.

Chad_the_short_seller's picture
Chad_the_short_seller (not verified) Jul 17, 2015 9:15 AM

You wanna make money off this? Buy calls on chau, ashr, yinn. The crash was a trading opportunity just like greece was to the us markets. I shorted china on the way down and now it's time to go long. The gov't will pump it up to new highs.

TheReplacement's picture

He's right.  Look at the chart.  This is only strike two.  Chinese are huge into baseball.  Or is that the Japs?  Either way, they have slanty eyes and want to be like us.  Go long, for a short while.

Cthonic's picture

Privatized equity gains and socialized losses must work as well in China as it does here, right?  How do the 1,200 million Chinese without trading accounts feel about that?  Guess they're too busy sorting ewaste or plucking rice to complain much.  Gotta gather some assets, assemble some iwatches.  "It takes money to make money, bitches"  -- Yellen

CHC's picture
CHC (not verified) Jul 17, 2015 9:34 AM

How can you possibly lose?!?!?!?!?!?

The Count's picture

Thats the same thing traders thought that were short the Swiss Frank.

The Count's picture

The Chinese don't want to learn from past bubbles elsewhere because the Chinese LOVE to gamble. For those not familiar, gambling is ingrained in their culture, no joke.

TheReplacement's picture

That's not true.

Wanna bet?

Obamamerica's picture

Why doesn't Soros go after China instead of the USA?

Oh wait, dumb question. 


Hail Obama, Messiah Obama!

roisaber's picture

The idea that China will make the same mistakes as the USA, to the letter, is becoming quite unsettling.

TheReplacement's picture

There is a book.  You will find it available on Amazon.  Amazon has two day free shipping if you have a Prime account.  A Prime account cost me $99 per year.  I mention this because I find it quite useful and affordable for those odd items that are simply not available locally.

Anyway, the book, None Dare Call It Conspiracy, explains the origins of this China moment and what you see happening today.  If I recall correctly the book came out in 1971 as the import was to affect the outcome of the 1972 Presidential election.  Spoiler Alert:  They failed but ultimately their target discredited himself although it was mostly on a personal level and not in regard to his policies.

Get the book.  Read it.  You will understand as you watch events unfold.  'In politics and high finance, nothing happens by accident.'

Chuck Knoblauch's picture

And what the hell is the US doing?

TheReplacement's picture

Proudly leading from (bend over) behind!

For the children, Forward!

and back

For grandma, Forward!

and back

for your mom, Forward!




buzzsaw99's picture

providing finance isn't really full-kuroda imo. full-kuroda is like full retard.

Fire Angel's picture

This is the greatest Tyler Durden story so far! You had me at Space-X, hahaha. Brilliant stuff! Excellent and snarky summary, putting a funny face on grave danger. Thanks for all your hard work. 

Fire Angel