Every western media outlet was reporting about how the Chinese bubble was deflating at an extremely fast speed as its stock market decreased by 30% from 5,200 points to roughly 3,500 points before rebounding towards 4,200 points. It seemed like the world was heading towards Armageddon until the Chinese government stepped in to rescue the Shanghai Stock Exchange.
It quickly instated new measures to ensure the stock market would have a ‘soft’ landing. The Chinese government announced pension funds were suddenly allowed to purchase shares which suddenly generated almost 100 billion dollars in additional support for its falling stock exchange. This first step wasn’t enough, and the Chinese government asked/forced the brokers to step in by pumping an additional few dozen billions of dollar in the market to stop the freefall. In its final move, China has instructed a $483B state-owned fund to start purchasing shares on the open market to ensure there’s a bidder for stock other people want to dump.
According to a professor at the university of Beijing, the total amount of stimulus provided by the central government was $1.6 trillion dollars, in just a few weeks/months time, and that’s massive. Keep in mind the total program of the USA to save its banks through the Troubled-Assets Relief Program (TARP) had a size of less than half of that.
The extremely strong reaction from China teaches us two things. First of all, China is prepared to unleash everything it has got to stabilize its stock market. It really tells you it will do ‘whatever it takes’ (where have we heard that before?) to stop the crash. Did you hear that, Super-Mario? If The ECB’s ‘plan’ was a ‘bazooka’, how would you describe the Chinese plans?
Secondly, there’s another reason why China wants to stabilize its stock market as fast as possible. As we reported before, the country is currently in discussions with the International Monetary Fund as it wants to get the Chinese Yuan to be included in the package of the Special Drawing Rights-system. If this would happen, the influence of the American Dollar would very likely decrease.
According to our most recent information, the IMF officials seem to be quite receptive to include the Yuan in the SDR-basket as it’s indeed a relatively strong and stable currency – but of course, if the stock market plunges, its entire application gets discredited. The initial report of the IMF comments the Yuan definitely is a ‘significant currency’ but that it isn’t sufficiently tradeable just yet.
But the IMF is definitely charmed. The review of the SDR basket usually happens once every five years, but now the International Monetary Fund is willing to review the situation again in just one year, and this could already be seen as a victory for China.
On top of that, China now gets an additional 17 months to continue to buy physical gold on the open markets and that’s an opportunity China won’t ignore.
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