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There Is No Exit: Why China's Plunge Protection Is Here To Stay
When rhetoric and simultaneous policy rate cuts failed to arrest the slide in Chinese equity markets late last month, Beijing resorted to threats, trading halts, and finally, to central bank intervention.
An unwind in official and unofficial margin lending channels had put immense pressure on the country’s stock market bubble and when it became apparent that the only way to arrest the slide was to prop up margin lending, the PBoC moved to backstop China Securities Finance and in the process created an $800 billion, state-controlled, margin lending Frankenstein.
For a few days, calm returned to Chinese equities but to those with a keen eye, it was clear that the relative tranquility would not last.
As we noted last week, China was apparently so confident that three week’s worth of unprecedented (and comically absurd) intervention had stabilized the situation and repaired what we still contend is irreparable damage to the collective psyche of the Chinese retail investor, that the PBoC was set to wind down the CSF’s plunge protection activities just days after several commercial banks pledged billions more in support for the margin lender. We got a good look at just how unstable the situation still was when, last Monday, Bloomberg (citing Caijing) reported that the CSRC was "studying [a] stock stabilization fund exit plan."
Here’s what happened next:
Fast forward exactly one week, and although it’s not entirely clear what actions the CSF has taken recently (i.e. to what extent more money has been funnelled to brokers), what is clear is that whatever respite Chinese investors enjoyed is now over.
As noted on Sunday and again earlier today, there’s still plenty of evidence to suggest that when one looks at official margin lending and the leverage that’s spread across at least six backdoor channels, the unwind has probably just begun and as BofAML notes, "most leveraged positions may suffer from losses likely in Rmb trillions."
That is unless Beijing moves to "take on substantially all of the leverage." This harkens back to comments made on July 18 by Finance vice-minister Zhu Guangyao who noted that "the key is what step the financial regulator should take after the stock market is stabilised, including the withdrawal of the intervention methods."
Here's a look at known CSF funding and spending so far:
If the CSF support dries up, the result could be carnage. Here’s BofAML with more on a potential unwind of China’s plunge protection program:
The balance sheet of CSFC, the vehicle the government has been using to stabilize the market after the crash, is unclear. Local media has reported that it had drawn down Rmb1.3tr from an Rmb2tr credit line provided by banks; the PBoC had also lent CSFC at least Rmb120bn and might have subscribed to Rmb80bn of its bonds.
In turn, CSFC had used the fund to buy A-shares directly or indirectly by lending to brokers to fund their proprietary desks (as discussed earlier), and subscribing to ETFs and mutual funds.
The equity base of CSFC, after the increase on July 3rd (most likely funded by PBoC), is only Rmb100bn while it may be carrying Rmb1tr+ stock positions by now (the size is likely still rising by the day based on our assessment). So unless the government will treat CSFC as another bad bank and allows it to carry the losses "indefinitely", at certain point, CSFC may sell to reduce its stock exposure.
An "indefinite" holding period is certainly possible – it’s how the government had dealt with the last round of bad debts in the banking system, i.e., by shifting them to bad banks and never crystalizing the losses. But even under such a scenario, there may be unintended consequences. For example, these loans to fund stock purchases have expanded RMB supply. Unless the government sterilizes elsewhere, particularly if the government has to buy Rmb trillions more stocks in the market going forward, property bubble risk may rise and RMB may come under pressure.
If it sterilizes, real business may suffer from less available credit as a result. Obviously the ideal scenario is if CSFC ultimately sells the stocks on its book at a profit, similar to what the US government managed to do with its capital injection into a few banks. However, we judge this outcome unlikely given the highly inflated valuation.
As you can see, there really is no right answer here and indeed the PBoC may now be in a position that's become all too familiar for DM central banks.
That is, an exit simply isn't possible.
Simply selling the shares now would be a disaster for obvious reasons (just look at Monday's action) while liquidiating the portfolio at a profit will likely prove to be impossible given the high prices paid for the stocks. Amusingly, Beijing may be forced to do exactly what the ECB has done to excuse the fact that Mario Draghi is buying €1 trillion in EGBs above par - classify the whole portfolio has "held to maturity." Only stocks don't mature, so China will need to invent a new bucket called "held to indefinitely" which isn't all that much different from forcing banks to perpetually roll bad debts in order to "manage" NPLs, something Beijing has been doing for quite sometime.
Clearly, this is has the potential to exacerabte capital outflows given the pressure it could put on the yuan. Nevertheless, "stabilizing" the market is likely to take precedence in the short-term which is why you should expect the plunge protection headlines to come fast and furious. And sure enough, just moments ago:
- CHINA TO CONTINUE STABILIZING MARKET, SENTIMENT, PREVENT RISKS
- CHINA SEC. FIN. CORP. HASN’T EXITED STOCK MARKET: CHINA’S CSRC
And for comic relief, we'll leave you with the following comment from Finance vice-minister Zhu Guangyao, also from July 18:
"[The turmoil] has come to an end."
* * *
Full statement from CSRC (Google translated):
Q: Recently, some media reports, speculation, "national team" has been withdrawn, no bailout of. I ask whether it is true?
A: This is totally untrue . The SFC will continue to stabilize the market, to reassure, to prevent systemic risk as a working goal, to do related work. China Securities Finance Company did not quit, and will choose the holdings, continue to play a good function to stabilize the market.
Q: According to reports, the recent focus on selling large number of individual stocks, if the case of malicious short existence?
A: Do not rule out this possibility. SFC is the power of organization clues about verification, once verified, will be severely punished. Welcome to the community to report to us, to provide clues.
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The plunge in China can be easily explained.
Dennis Gartman must’ve gone “pleasantly long China”. ;-)
Looney
Teamed up with Cramer and Nadler.....they call themselves....The Expendables.
Or the Three Amigos......it's not really nailed down.
Printing Press > Central Bank Balance Sheet
Bry the frucking dip yu frucking communists.
The printing press is so 18th century... A barbaric relic, if you will. These days we just digitally put more zeros into accounts, which means that any central balance sheet can have whatever it wants.
But wait...evryting awesum in China...EVRYTING
Chinese bond vigilantes...
First they tried to drown them in liquidity, per Bernanke. When that didn't work, they resorted to the old ways.
Somehow The soldier in the foreground pulling the trigger restores my faith in humanity, because he turned his head... or maybe he just didn't want to get any in his eye.
Ill go with eye for 1000 Alex.
Is that a right frontal lobe or a cerebral cortex?
Yes, luckily, I heard Wang Fu announce today, "It's contained."
Some folks there have not learned yet, never pledge your house/aprtment to buy stawks. Ends badly 95% of the time. You lose your stawks and house at the same time.
That's what the media told me:
http://qz.com/61375/forget-the-ghost-cities-scare-chinas-housing-market-...
You mean that China's centrally planned paradise for markets is really a Gulag? It can't be!
Just mind boggling how the chcioms are pissing away their wealth.
The Chinese are masters of smoke and mirrors, but the smoke is from hopium and the mirrors are from the fun house and its about time to go full retard......
"The Chinese are masters of smoke and mirrors..."
Yeah, they learned it from Washington, Wall Street and our mainstream media. Apparently they didn't learn it as well as the true masters.
Study history, the Chinese created modern bureaucracy centuries ago and force majeure has alway been business as usual.....
No shit? You mean to tell me a culture that's essentially over 5,000 years old developed complexity and ugly systems to control people? Who would have guessed?
They were never successfully invaded because their bureaucracy always won, at least until Britain showed up and already had a functional (yeah, I know) bureaucracy of their own. China has never truly been communist, but it made a great excuse for the latest mandarins to inflict their will on the peasants....
Come on - the US PPT has been in action since January 1988. No one complains about that. Of course, the Chinese PPT will be in action a hundred years from today.
The real nightmare for the Chinese is that a crash in stocks crashes its $200 trillion real estate bubble. The stock market is worth only $7.5 trillion or so today.
China Shanghai Composite target 2000?
world's No. 2 economy, knocking down global equities and the prices of key commodities.
http://tersee.com/#!q=stocks&t=text
Ring fence the little fuckers. That'll show 'em. See how well the ring fences have worked every where else? You don't? What the fuck's wrong with you? Look! Just look! Everywhere it's working, you see a rig fence around it! Whaddu mean what's a fucking ring fence? It's a fence in the shape of a ring around the thing to keep the Roseys on the outside and the anti-Rosey thingamajiggies on the other side. Well, one on the one side and one on the other side. Or is it the other way around?
RING FENCES!
THEY HAVE MORE RING FENCES THAN WE DO!
WE'RE FACING A RING FENCE GAP!
If you start with the premise that this whole "Financial" system is built on pure BS it all makes sense.
This whole thing is built on the next bigger fool to come along. Problem is, all the fools are out of money.
China is simply keeping up with the USA....modernizing with miniskirts, bikinis, bright color clothes and PPT's ...they're all very hip now.
Out with the dull grey chairman garb andin with vivid color Twiggies!
China PM: Why malkets down? You terr me you keep them up!
PBoC Govlenoah: Oppps. I just PPT my pants! So solly!
...and that is what we call FED SQUARED.
Good luck with that whole BRICS thing.
Elgrin Groseclose on the fall of the Roman Empire describing it in 300 A.D.:
"The disintegration continued, and there was no power great enough to stop it."
Unintended consequence ........
Everyone gives up work to play the stock market as Central Banks have made them a one way bet.
Why work?
Invest and let your Capital and Central banks do all the work.
So what does this mean? I can just blindly invest in the Chinese markets when they plummet and not worry because they will always go back up? Talk about pride! At what expense is China doing this? They are destroying the integrity of their market and destroying the integrity of the Yuan. This will hurt their nation greatly in the long run.
You think anyone in power cares about the integrity of the markets anymore? They know it's coming apart, they're just all trying to hold out longer than the others. It's not about winning, it's about being the last man standing.
POS communists. This is not a market, it is a rigged bag of shit. It will come down eventually, no matter what these idiots say or do.
The central banks did all the inflating of equity prices, so let them absorb it all by buying the shit themselves. As long as they ARE buying, sell it to them and get out.
Then you can sit safely on the sidelines and watch 'em choke on it.
So will their be continued US treasuries being dumped by China?
Please, will someone tell me this will lead to no more crap at Walmart? What will the FSA do staring at empty shelves?
Miffed
"He owns the whole block, he's a very rich man. Rich? This place is a dump, Wang"
-Jack Burton, Big Trouble in Little China
This is what they call a Chinese 401K Hunnan style.
"An "indefinite" holding period is certainly possible – it’s how the government had dealt with the last round of bad debts in the banking system, i.e., by shifting them to bad banks and never crystalizing the losses. But even under such a scenario, there may be unintended consequences."
There is no may. For each action, there is an equal and opposite reaction. Unintended consequences will occur.
China still loves buying gold and dumping US sovereign debt.