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It's Not Just Margin Debt: Presenting The Complete Chinese Stock Market Ponzi Schematic
Late last month in "The Biggest Threat To Chinese Stocks: Shadow Lending Crackdown", we suggested that the pressure on Chinese equities - which at that point had only begun to build - was at least partially attributable to an unwind in the country’s CNY1 trillion backdoor margin lending edifice.
As we explained, brokerages were only allowed to facilitate margin trading for investors whose account balances totaled at least CNY500K, and even then, traders could only lever up 2X. Brokerages naturally looked for ways to skirt the rules, leading to the development of multiple off-the-books vehicles and creating a situation wherein the official headline figure for margin lending (around CNY2.2 trillion at the time) woefully underrepresented the actual amount of leverage behind China’s world-beating equity rally.
Put simply, precisely measuring the amount of shadow financing that helped China’s legions of newly-minted retail day traders make leveraged bets on the SHCOMP and Shenzhen is virtually impossible, as is determining how much of that leverage has been unwound and how much remains or has been restored thanks to Beijing’s explicit efforts to reignite the margin madness by pumping PBoC cash into CSF.
For our part, we’ve suggested that regardless of what the actual figure is, the important point is that the unwind has probably just begun. In short: it seems unlikely that all of the leverage has been squeezed out of China’s exceedingly intricate shadow financing system.
As it turns out, BofAML agrees and is out with a valiant attempt to not only identify each shadow lending channel, but to quantify just how much leverage is built into the Chinese market.
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From BofAML
We estimate that margin outstanding, only from the seven channels that we can estimate reasonably, easily exceeds Rmb3.7tr. Assuming an average 1x leverage, it means that at least Rmb7.5tr market positions are being carried on margin, equivalent to some 13% of A-share’s market cap and 34% of its free float. Meanwhile, A-shares ex. banks are still trading at 36.6x 12M trailing PER. We believe that the government will struggle to hold up the market beyond a few months, unless it is prepared to let go some of its other policy objectives including RMB credibility. When the market ultimately settles at a level that can be sustained on fundamental reasons, we expect that the balance sheet of most financial institutions (FIs) may get impaired and the financial system may wobble, due to high contagion risk.
Leverage means relentless selling pressure.
The seven channels mentioned above are margin financing (MF), stock collateralized lending (SCL), umbrella trust (UT), stock benefits swap (SBS), structured mutual fund (SMF), P2P and offline private fund matching. There are a few other difficult–to-estimate channels, such as banks’ corporate/personal loans that ended up in stocks, brokers’ proprietary desk and funds’ subsidiaries. We suspect that the size of these may be Rmb1-2tr. In addition, China Securities Finance Corp. (CSFC) might have borrowed Rmb1.5tr from banks & PBoC to buy stocks. All the leveraged positions may want to unwind at certain point given the inflated collateral value, in our view. Additional selling pressure may come from hedge funds with compulsory winding-down clauses, when the market heads lower.
* * *
So there you have it - an estimated CNY3.7 trillion in still-outstanding margin via official and unofficial channels. We'll have much more soon on how each channel is structured, where the biggest risks lie, and the broader implications not only for China's stock market and economy, but for the renminbi as well.
For now, we'll leave you with the following rather ominous quote from BofAML:
The risk is that the unwinding of the leverage will be disorderly – due to implicit guarantees behind most shadow banking financial products, investors could easily panic if they suffer from meaningful capital losses, by our assessment.
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Surprise surprise. China's murdering Maoist government is still corrupt. International Socialism must be destroyed.
Of course the paid Maoist minions who troll ZeroHedge ALWAYS leave negative replies whenever their dear leader(s) or murderous communist system is criticized. EVRYTING AWESUM IN CHINA!
"the paid Maoist minions who troll Zerohedge"?!?
What are you smoking?
Windowpanes.
Ray Dalio says to get out of China!
http://www.planbeconomics.com/2015/07/ray-dalio-says-to-get-out-of-china...
murderous is the american system. your army kills millions arround the globe.
you possess 1000 army bases outside your territory.
you want to keep war burning in EUrope.
You want to tear appart Germany and Russia.
it is you.
If this sounds like socialism to you then I suggest you open a dictionary and a history book.
do you know what the NEP was, Mr. Wang?
something, what worked, despite the fact,that lenin was a heavy jew.
yes, dzugasvili stopped it.
What about corruption in US?
Koch and adelson determine, who dares to run for WH and who not?
Yes, there is a corruption in China, but How do you call it, if a person with interests in Israel, like dual citizen Adelsohn and dual citizen Koch determines by means of moeny, who is allowed to runf for WH and who not?
Not a corruption?
In my eys corruption in China is negligible, compared to the corruption in US.
Every government is corrupt. It is part of the nature of the beast.
If you believe the Chinese variant is especially evil, then you need only withhold your support, and wait for nature to take its course.
The word 'evil' has real meaning...it refers to destructive behaviour. Because we are all humans, and more alike than not, destructive also means self-destructive.
Every government is now engaged in a ponzi scheme to support markets. The land of the free has been engaged in a ponzi scheme to support markets since January 1988.
What is the leverage of the futures that Kevin Henry is usually buying?
Unless the Fed is audited, the size of the ponzi scheme at home will never be known. But do not expect BofAML to mention that.
Forward - to more fraud.
How The Fed Is Helping To Rig The Stock MarketTherefore, to make this really simple, the Fed creates $4 billion a day and eventually some of that money goes into equities. And that, of course, helps keep stock prices elevated. So it doesn’t matter that we are having major problems with the underlying economy and markets that normally would depress stock prices.
http://www.forbes.com/sites/investor/2013/01/30/how-the-fed-is-helping-t...
"the Fed creates $4 billion a day and eventually some of that money goes into equities."
Almost all of that goes into some form of financial investments and only increases wealth "on paper". Once the Chinese market breaks down, you will see selloffs in other markets to cover losses. Tons of paper wealth will be destroyed and tons of debt will be wiped out. (This is why I expect serious deflation coming.) Most financial assets are backed by debt, and most debt is used to buy financial assets. We are about to go from trillions in assets = trillions in debt to millions of assets = millions of debt. If you are familiar with accounting at all, you know that liabilities always remain equal to assets. get ready to move all the decimals about 4 places to the left.
headline next week: chinese finance minister: " we told the people to buy gold and silver, those that did are happy."
Well the fed ponzi scheme
The US stock market fed fed ponzi scheme
The Chinese dirty suitcase money real estate/visa/college for son/free school real estate ponzi scheme
And then the crowning ponzi scheme the Chinese stock market ponzi scheme
WHAT I WANT TO THINK THROUGH Is how this is going to end and how to capitalize on it. I have sold everything. Am sitting on cash.
Housing rentals maybe? All those owners have to go somewhere? But then they wont be able to pay high rents?
Maybe just sit tight and wait for the bust ready to buyl
You see, just say something...anything negative about the murdering, manipulating, marauding Maoist/Marxists who run China and its markets MAFIA style, and you'll get a little red negative number on your comment. That's cause they can't stand the idea that their command and control tyranny is being publically, legitimately, and accurately criticized and eventually like all other ANTI FREEDOM systems will collapse like a house of fortune papers. Try it - write a negative comment about China and its commie bastard dictators who put on happy face for the world and watch the blood red numbers accumulate.
No fu king wei!
Yu my HERO!
Thanks for the sunday funday laugh Phart
Me so greedy
Me love leverage long time!
Uh, China is a country in which the government executes political prisoners in order to harvest their organs. Where they produce fake malaria drugs that are worse for the poor schmucks who take them than taking no drugs at all. Where they have whole towns of men who will never marry because of sex-selective abortion. The U.S. is a mess, but the zillions of Chinese people whom I see newly arrived here in CA, are here for a reason.
China carbon copied the US banking an financial system years ago!
Now they're ready to be the US. Financially and militarily!
PANIC FIRST!
The real danger in the US stock market is that many companies are borrowing money at extremely low rates and than start a buy back program of their shares. This cycle eventually stops for many reasons and than it unwinds in a hurry (just see "CAT" shares as a small example......)
By then the CEO sees's himself as having moved on with his loot and it is upto some other sucker to clean the mess up.
Someone has obviously found a way to run a pozzi so that it doesn't ever pass it's growth limitation point.
The Chinese do seem to excel at creating shadow financing/banking conduits.
Considering huge investments by China around the globe, as reported by NYT today, means any China MELTDOWN WILL BE GLOBAL. While Defense Dept. believes Russia is greatest military threat to US, in reality greatest economic threat is Federal Reserve Bankers and China,
Everybody and everythigis a threat to them today.
even a butterfly in africa, swinging its wings, will cause a collaps. everything but ot them, the saint bankers.
Amazing what humans do for short term profits or domesticated animals for the next meal. Woof, Woof roll over Fido.
I was swinging my baseball bat today......, might have hit a butterfly, but no radical change to China that I could see.
Worrisome is the fact that the major British Banks are exposed by a factor of 3-1 to their capital, in China. They could go insolvent overnight just by what happens in China. This has been confirmed by Carney at the last monetary policy press conference.
Unlike the West, they have been buying tons of Gold.The only hiccup was the stock slide and then the Gov't
freezing the shares for six months.Might spook investors if they think they can't run for the door.The problem
is all the derivatives linked to long term growth in oil price.With Iran coming online,oil will drop.Those oil longs
have gotta be burning a hole in someones' pocket.Everyone is in a packed elevator,"Okay,who farted?".
You may find this article written in 1992 on the 'birth' of the Shanghai stock market of interest:
http://www.chinafile.com/reporting-opinion/viewpoint/china-plays-market
no problem Cuz..... just revalue that yellow metal....but buy a shitload first.
Looks like China created itself a nice 'subprime' problem.
Good luck with that. We know how that movie ends.
love a good orgasm.
not too dip this time
As long as the Chinese gov. has control on the stock market nothing major will happen. The problem will come when the amount of money needed to keep it from crashing will become too big. Next QE foolishnness will be China...
All is fine.
ho lee fuk
CNY3.7 trillion = $604 billion merkin
That's almost like real money.
Revolution is coming...
Communism and Islam are two worst things human invented.