China Spends 10% Of GDP On "All Bark, No Bite" Stock Bailout

Tyler Durden's picture

"With so many retail investors in China’s stock market, a collapse of share prices affects people’s savings, incomes and welfare. Many no doubt invested because they were confident in the government’s capacity to rescue the market. This may explain, in part, why Beijing intervened so quickly when the market plummeted. Still, while Beijing’s instinct to protect investors is understandable, the best way of doing so is to create a modern capital market."

The quote featured above is from an FT op-ed penned by none other than everyone’s favorite bazooka-wielding, ex-Goldmanite Hank Paulson and as you might have gathered, there’s something particularly amusing about the former Treasury Secretary’s message to China.

Here is a man who once charged up Capitol Hill, stormed into Congress and demanded a multibillion dollar check for Wall Street telling Beijing that their stock market bailout is "understandable" but ultimately inappropriate.

In fact, both TARP and China’s official support for CSF amount to three-quarter trillion efforts to shore up flagging investor sentiment. Given Paulson’s experience with such things, perhaps he can help Beijing understand why so far, $800 billion has proven largely ineffective at restoring the country’s previously world-beating equity bubble. Here’s Reuters with more on a "stock rescue" plan that’s all "bark" and no "bite":

China has enlisted $800 billion worth of public and private money to prop up its wobbly stock markets, a Reuters analysis shows, but the impact of the unprecedented government-orchestrated rescue has so far been modest.


Public statements, media reports and market data reveal that Beijing unleashed 5 trillion yuan (515 billion pounds) in funds - equivalent to nearly 10 percent of China's GDP in 2014 and greater than the 4 trillion yuan it committed in response to the global financial crisis - to calm a savage share sell-off.


But while the 2008 stimulus package staved off recession, analysts wonder what benefit the stock rescue package can bring to offset the risk the government is buying stocks at valuations private investors are no longer willing to pay.


"I'm quite negative towards the rescue," said Yang Weixiao, analyst at Founder Securities in Beijing.


"The problem is, all these measures only change the supply-demand relationship, without changing the fundamentals. So there's no real support, and the calm could be only temporary. If the governments exits the bailout, prices could accelerate their journey back to fundamentals."

And as we noted first earlier this week, the mere suggestion that the CSRC was set to lock the state-run, margin-trading Frankenstein back in the lab was enough to send futures reeling. 

Respected private finance magazine Caijing also reported that the CSRC was considering withdrawing money from a stabilization fund, roiling markets before CSRC denied the story.

But through it all, a shift in retail sentiment from "it’s easier than farmwork" to "I'm now waiting for the market to rebound so that I can get out," means that every centrally planned rip will be sold by the very same semi-literate housewives whose leveraged bid used to mean that every unexpected dip would be bought. 

And that explains why China’s plunge protection is doomed to fail and has thus far been only marginally (no pun intended) effective. Here's Reuters again:

But the response has been lukewarm.


While the market stabilised, with the Shanghai Composite Index .SSEC recovering about 20 percent by Thursday's close from a low point around 3,300 points struck on July 8, it is still below the semi-official recovery target of 4,500 points.


Beijing has thus produced the equivalent of around 1 index point gain for every $1 billion committed.


And market stability remains untested given the large numbers of companies still subject to trading halts. Reuters calculations show that around 20 percent of listed companies in Shanghai and Shenzhen are not trading at present, down from around 40 percent before but still extremely high.


"If valuations are mean-reverting over time, which a lot of people think they are, that means that valuations could go down in the future," said Batson. "Which means that whatever buying the government does today could end up imposing a longer-term financial cost."

Of course, as Reuters goes on to note, the decision to give the CFS nearly a trillion dollars in dry powder may have been a move designed to remind investors that betting against the PBoC's balance sheet is not a good idea (it's the whole "don't fight the Fed" argument). As one economist put it to Reuters, "presumably the whole point is to say that you are going to spend this money, and then by saying it you don't actually have to spend it." 

We're reminded of 2007, when the very same Hank Paulson whose latest ruminations appear atop this article said the following on the way to nationalizing Fannie and Freddie: "If you have a bazooka in your pocket and people know it, you probably won't have to use it."

Seven years and $3.5 trillion in Fed monetizations later, that has proven to be a profoundly naive assessment, which is why one should expect that when we look back seven years from now, the idea that "there's no such thing as Chinese QE" will be just as laughable as Paulson's contention that the monetary bazooka, once loaded, would rest harmlessly on the shoulders of the "independent", "apolitical" FOMC never to be fired.

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JustObserving's picture
China Spends 10% Of GDP

How much did the Fed spend on bailouts during the financial crisis of 2008?  It was well over 100% of US GDP. It's great to have the financial press as your poodle.


The Fed's $16 Trillion Bailouts Under-Reported

Hype Alert's picture

I wonder if they know that 10% of GDP can just evaporate into thin air in just a few minutes in the stock market?  Now, that might piss their people off.  Banana cart traders and housewives doing it are one thing, but the people running the show that blow 10% of GDP need to be shot.  And in China, they will be.

Government needs you to pay taxes's picture

"Modern capital markets": Where the barely-visible Hand of God reaches down and trips the algos, goosing the equity indices before the mkt open, whenever prices decline, and def toward the close.

KnuckleDragger-X's picture

Did St. Krugman visit China and I didn't hear about it? Or did Chinese hackers steal Kuroda's secret plan for economic domination? Enquiring minds wanna know.....

Mark Urbo's picture

They read his book...


..soon they will burning it for warmth.

i_call_you_my_base's picture

So Paulson is short china.

FrankieGoesToHollywood's picture

What else are they going to spend all their money on?  Public access channels to allow free speech? didnt think so.

reader2010's picture

"Still, while Beijing’s instinct to protect investors is understandable, the best way of doing so is to create a modern capital market."



It Sounds really familiar, doesn't it? Fuck your Neoliberalism/Free-Market-Knows-All bullshit. What you're saying is that you want let Wall Steet fuck everyone's ass 24/7 nonstop. 

asteroids's picture

Time for China to announce QE (ie money printing). Then a real shit storm will arise.

wrs1's picture

Gee and here I thought China was the model around here with their gold exchange and all those smart chinese citizens buying gold.  But no, the chinese govt is bailing out the stock speculators by selling gold at a loss.  Gee, whodathunkit?  No one around here, that's for sure but then that's no surprise since everyone around here just backs up the truck to throw more good money after bad.........

gaoptimize's picture

And when they try to unwind this trade, and the sellers have 5T of Chinese Gov. money in hand?  The net effect is to debase another fiat currency.  Bearish for PMs?  I don't think so.

AbbeBrel's picture

Wow there are Fundamentals in the China stock market? Wow - there are Fundamentals in *any* Centrally-planned stock market?? Maybe someday... Still some of the troops (stocks) marching toward that blow-off peak are dying along the way (think of Napoleon's march on Moscow, and winter is approaching).

Peter Pan's picture

Sooner or later we all need to stop using the word market and perhaps we need to start using the term dry cleaners to describe more aptly what is occuring in so called markets.

besnook's picture

the western zionazis are upset the chinese stock market rout has been and will be halted by chinese .gov money which is a balance sheet with literally no bounds.

sun tzu's picture

I believe this whole Chinese stock market pump-pump was engineered by the western zionazi bankers to force the Chinese government to liquidate their physical gold reserves in order to save their financial system.