Leaked Note By Chinese Think Tank Warns Of Potential "Financial Panic"

It's not just Trump who is concerned about the level of the S&P as a result of escalating trade war with China: it appears that China is growing worried as well, and for good reason - as we noted earlier, the Shanghai Composite already tumbled to a bear market from its highs 6 months ago, a drop which comes at a very precarious time for China whose economy is slowing amid an aggressive deleveraging campaign, corporate defaults are rising, and the all important credit impulse is waning.

Confirming as much, this morning Bloomberg reported of a leaked report from a Chinese government-backed think tank which warned of a potential “financial panic” in the world’s second-largest economy, "a sign that some members of the nation’s policy elite are growing concerned as market turbulence and trade tensions increase."

According to a study by the National Institution for Finance & Development that was seen by Bloomberg News, bond defaults, liquidity shortages and the recent plunge in financial markets pose particular dangers at a time of rising U.S. interest rates and a trade spat with Washington. The think tank also warned that leveraged purchases of shares - i.e. stocks bought with margin loans - have reached levels last seen in 2015, when a market crash erased $5 trillion of value.

"We think China is currently very likely to see a financial panic,” NIFD said in the study, which appeared briefly on the Internet on Monday, before being removed. “Preventing its occurrence and spread should be the top priority for our financial and macroeconomic regulators over the next few years.”

As Bloomberg adds, te study provides "another indicator that China is growing concerned about the knock-on effects of trade tensions with the U.S."

In recent weeks, prominent academics have begun to question if the country’s slowing, trade-dependent economy can withstand a sustained dispute, which has already started to weigh on stock prices and the yuan.

In other words, while Trump may be worried how much of a drop in the market the US can sustain before it impairs midterm election chances, China is just as worried, with the NIFD warning that China had failed to address the issue of leveraged stock purchases, a major contributor to the market collapse three years ago. Such bet reached about 5 trillion yuan ($760 billion), a similar level to 2015, according to the NIFD report.

"We failed to clean up the leveraged funds after the 2015 market rout; they have staged a comeback in a new guise," NIFD said.

As we noted over the weekend, last week UBS said that it sees a growing risk in China's stock pledges; the bank calculated that the market cap of pledged stocks that have fallen below levels triggering liquidation amounts to 440 billion yuan with some 500 billion yuan below warning line, which translates to ~1% and 1.1% of China’s entire market value of $6.8 trillion. A separate analysis by TF Securities, as of Jun 19th, stock prices of 619 companies were close to levels where margin calls will be triggered.

The think tank concluded that China’s State Council should be ready to implement any market support measures in coordination with the central bank and other regulators, key government ministries, and even the police: it was unclear if that implies arresting short sellers as happened shortly after China's bubble popped in 2015.

Comments

Ghost of PartysOver Wed, 06/27/2018 - 09:52 Permalink

Trump wins again.  China knows it can't win a trade dispute.  Best they come to their senses and enter into a Fair Trade Deal.

On the flip side, Romney won the GOP Primary last night so that is a disappointing loss.  No Park City ski vacation for me this year.

tmosley Ghost of PartysOver Wed, 06/27/2018 - 10:13 Permalink

Exactly. There are no gods here. Everyone is fucked up, and of course everyone knows that everyone would be hurt by a trade war. The only question is "who is the first to go to the table". That is usually a mark against that side as far as negotiations go, but there is a point where you have to make that choice. Trump has done it publicly. Who knows what is going on behind the scenes? Nobody in the clown gallery, I can tell you that much with certainty.

In reply to by Ghost of PartysOver

Money_for_Nothing Ghost of PartysOver Wed, 06/27/2018 - 10:15 Permalink

Romney is a lying politician. Scion of a prominent family. Born in Mexico. Former Governor of one of the most socialist states in the US. Romney/Bush/Kennedy/Kerry. What's the difference?

Not a Republican as far as policies. Not a Citizen of Utah, Massachusetts, Mexico or even the US in the original sense of the word. Bragged about lying that he would rid the US of Obamacare. A pretty prince with a pot-load of money made from family connections. Trump needs to watch his back when Romney is around.

In reply to by Ghost of PartysOver

shortonoil Ghost of PartysOver Wed, 06/27/2018 - 11:30 Permalink

Trumps best possible move is a breakeven. 50% of US imports coming from China are being produced by US companies operating out of China. If China goes down so do they, and so does the US equity market. The US dollar would soon follow. Because we are close to the end of the oil age, the developed economies must continue to extract capital from the Emerging Markets to remain solvent. The $4 trillion per year that is presently being extracted can not be increased without collapsing the whole fragile structure. There are no winners when every one is losing.

In reply to by Ghost of PartysOver

Winston Churchill shortonoil Wed, 06/27/2018 - 12:10 Permalink

Yet it must increase as the lowering return on energy invested demands further cannibalization.

It will just suddenly grind to a complete stop at some point, you can only massage the figures for so long.

The laws of physics still apply however much we think we are demigods, the mass insanity from overpopulation

was also predicted from hidden animal studies long ago.Homo sapiens are a failed species.

Have a nice day.

In reply to by shortonoil

notfeelinthebern Wed, 06/27/2018 - 09:55 Permalink

What did the Chinese expect when in a short 20 or so years the living standard goes from Hutongs (spelling?) and Bicycles to the modern world. It didn't happen organically or because of all the high quality goods they export. Party's don't last forever.