[11]
China seems to be going great lengths to protect its stock market, or even more importantly for them, to avoid losing face. It knows the entire world is watching the country as its economy seems to be unraveling at a fast pace. We already reported in a previous article about how the IMF seems to be overstepping its boundaries by putting another country in the spotlights to reduce the pressure on China.
A lot of wild guesses are circulating, but the country’s state planner says the country has approximately 200B Yuan in ‘unspent fiscal funds’ which it intends to deploy as fast as possible; potentially on major construction and infrastructure initiatives to provide a boost to the economy. However, a more unsettling rumor has reached us, as the central government in Beijing allegedly has seized 1 Trillion Yuan [12] in cash from local governments to boost its cash pile it can spent on these infrastructure projects.
Even though the state planner denied these rumors [13], we wouldn’t be surprised if they turned out to be true, because let’s be honest, do you really trust and believe the ‘state planner’ on his word? In every decent first-world country, governments, both federal and local, always run out of money and have to cut expenses and revise their budgets by the end of this year, but in China there would be a 160 billion dollar cash pile lying around without any local government wanting to touch it? Let’s keep it real, please.
China has always said it would not resort to Quantitative Easing [14] to fight the current downturn in its economy, but the cash that will be spent on its major infrastructure projects will have to come from somewhere and we all know the country wouldn’t hesitate for a minute to conduct a ‘silent’ quantitative easing whereby the government could ‘temporarily’ borrow cash from the Chinese central bank to fill the gaps. Do you think they’d ever tell us? Think again! And maybe China already has conducted an unannounced QE. One of the signs might be the fact the total amount of loans extended to China’s private sector has more than doubled in just five years time. That's a CAGR of 17.6% per year, definitely much higher than the GDP growth.
[11]
Or maybe the M2 money supply?
[11]
Source: Tradingeconomics.com
Additionally, instead of accepting market volatility and understanding that when a stock market’s value more than doubles in a very limited period of time a correction could be something healthy, the Chinese authorities are still looking for a scapegoat for the current crisis on the stock market. According to recent information, the Chinese government is focusing on one specific financial institution, alleging that company has damaged the country’s perception abroad by its fraudulous intention.
[11]
Source: stockcharts.com
That being said, it’s great for China to finally (try) to crack down on corruption, but the problem is this isn’t even the issue. Trying to reduce the corruption is a good start, but that’s not what the world is worried about. We know that corruption is an inherent part of the Chinese culture as of this moment, but the reason why the stock market crashed are the worries about the country’s economic situation. A round of quantitative easing might ‘ease’ the pressure on the economy, but China would have to swallow its pride if it wants to initiate one.
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