Submitted by David Stockman via Contra Corner blog
,
China’s stock market is purportedly all fixed and
the last two day’s 10% bounce is just the
beginning.Indeed, Goldman Sachs has
already reiterated that the whole thing is on the level, and
that the red chips will again be taking flight:
China’s biggest stock-market rout since 1992 has done nothing to
erode the bullish outlook of Goldman Sachs Group Inc………Kinger Lau,
the bank’s China strategist in Hong Kong, predicts the large-cap
CSI 300 Index will rally 27 percent from Tuesday’s close over the
next 12 months as
government support measures
boost investor confidence and monetary easing spurs economic
growth. Leveraged positions aren’t big enough to trigger a market
collapse, Lau says, and
valuations have room to climb.
Right. The Chinese economy is in an obvious deepening swoon
and the median company on the Shanghai exchange had a PE ratio
of 60X before the recent break. But no matter. Not only does
everything financial race the skyscrapers to the
sky in the land of red capitalism, but valuation upside is
apparently whatever the comrades in Beijing want it to be.
Says Goldman’s chief stock tout for China,
“It’s not in a bubble yet.”
.
Why? Because “
China’s government
has a lot of tools to support the market.”
To be sure, the confident Mr. Kinger Lau was still in
diapers when Mr. Deng proclaimed that it was glorious to be rich.
Or stated differently, when Deng set aside
Mao’s mistaken maxim that power comes from the barrel of a
gun in favor of the thoroughly modern notion that prosperity
comes from the end of a red hot printing press.
Actually, that’s the heart of the matter.
Mr. Lau and perhaps 50 million other Chinese punters
believe that growth and wealth are gifts of the state.That
is, they believe red capitalism works because the comrades in
Beijing are always ready to inject “whatever it takes” by way of
stimulus, guidance, controls, ever more debt and now,
apparently, prison sentences, too, to keep the bubble
expanding.
That millions of Chinese citizens are being annihilated
financially is hardly surprising.After all, the $3.5
trillion lost in the four weeks since the June 12th peak was pure
casino wealth. It did not even exist as recently as March
17.
That’s right. The Shanghai composite first reached the
3500 level (during this trip) exactly 60 trading days
before hitting the June 12 high of 5180. So what amounted to a
50% gain in no time ended up a 30% loss in even less time.
^SSECdata by
YCharts
There is no need to be pedantic about this. There is no
known form of honest economics in which a $3.5 trillion
bubble—equal to 35% of GDP—-can go through a birth and death cycle
in a mere 80 trading days. Nor should anyone in their
right mind believe that the Shanghai/Shenzhen casinos have any
resemblance to an actual stock market.
After all, during Wednesday’s plunge it seems that trading
in 1350 of the 2900 companies listed on these exchanges were halted
by the companies themselves and another 750 were halted by 10%
limit down rules. Yes, you can apparently stop a selling panic, at
least momentarily, when 70% of the names go radio
silent——especially when, at the same time, the heavy hand of
the state suddenly morphs into the shape of a mailed fist.
Stated differently, the desperate comrades in Beijing threw open
the People’s Printing Press of China to fund ostensibly
unlimited margin loans while simultaneously opening the doors
to a cavalcade of paddy wagons instructed to round up anyone
with the temerity to sell a stock. And in case
the meaning of mobilizing the gendarmes
was not self-evident, every company which had sold stock
during the last six months got an personalized order to buy back
this same shares forthwith.
All of this desperate action, of course, is only suppressing the
problem, not solving it.
The (trading) suspensions, which cast doubt on authorities’
pledge to give markets a greater role in the world’s second-largest
economy, mean that the Shanghai Composite Index’s 5.9 percent
tumble on Wednesday was probably understated. Investors who got
stuck in their positions are turning elsewhere to raise cash,
fueling the biggest drop in a month in Chinese government
bonds.
Indeed, the regulatory authorities in Beijing are so desperate
that they are allowing investors to answer margin calls
by pledging the millions of empty, vastly
over-valued apartment buildings that Chinese punters were
earlier lured into acquiring. Now that scam would make even
Charles Ponzi envious.
So are these people out of their minds? China is a
powder keg of debt. In fact, some $28 trillion of it. And,
according to the bean counters at McKinsey, upwards of $21
trillion of that was created in just the last 90
months—–during which time China’s GDP rose by only $5 trillion.
Apparently, even the comrades in Beijing had gotten a
tad nervous about the sustainability of creating $4 of debt
for each $1 of new GDP. Indeed, their “reform” plan was
to unleash “market forces” and to encourage companies to shed
their mountains of debt by raising equity capital in a vibrant
stock market.
Well, the stock market got vibrant all right and during the past
year several hundred billion of new equity was raised via IPOs and
secondary offerings.
But the debt pea was just being moved under another
shell.
In fact, margin debt soared by 5X in less than one year.
Nothing like this has occurred anywhere in the world since, well,
1928-1929 on Wall Street.
But the debt-fueled mania that under-pinned
America’s Great Crash turns out to be tame by comparison.
That’s because the above graph only covers official margin
debt supplied by stock exchange brokers.
It appears that China’s out-of-control shadow banking system
provided again as much, and without any rules as to collateral
maintenance or the financial capability of borrowers.
So compute the sum of combined margin loans from stock
brokers and shadow bankers and express the result in US
dollars. What you get is about $800 billion—–of which
upwards of $600 billion was advanced in just the last 12
months!
Now that’s 6% of GDP mainlined right into casinos that are
80% comprised of mom and pop retail investors. That the
resulting bubble has burst and made a mockery of Beijing’s
market based reform plans is evident enough. What is truly
frightening is that China’s authorities are so desperate that they
are now attempting to reflate the very same speculative bubble that
brought their financial system to the brink.
What is even more telling, however, is that
the clueless ramblings of a naïve kid just out of the London
School of Economics gets the Goldman Sachs imprimatur. And that
embarrassing state of affairs is the key to the global
financial calamity just ahead.
As Nixon might have said, they are all Keynesian statists
now
. Once upon a time, the grey beards of Wall Street would have
been horrified by the printing press economics of today’s
central banks, and would have had no trouble at all seeing that
China is the greatest eruption of
unsustainable debt, wasteful construction and
rampant speculation in human history. It has precisely nothing
to do with capitalism or any possible form of sustainable
economic growth and wealth creation.
In the process of taking its debt from $2 trillion in the year
2000 to $28 trillion at present, in fact, China has erected an
endless string of uneconomic public facilities and industrial
white elephants that boggle the mind. For instance,
it has 1.1 billion tons of steel capacity——400-500 million
tons more than its domestic economy will ever be able to use on a
sustained, sell-through basis. In fact, its
“excess”
steel capacity is greater than the total steel industries of
the US, Europe and Japan combined!
Likewise, it ramped up a cement industry of 2 billion tons that
is double or triple what will be needed when its construction of
empty apartment buildings, unused airports, carless highways and
bridges and pointless high speed rail lines finally comes to an
end. Indeed, during the three years ending in 2014, China produced
more cement than did the US during the entire 20th century.
The parade of excess capacity and white elephants is virtually
endless and includes copper products, aluminum, solar panels,
construction machinery, ship-building and every manner
of consumer goods. That used to be called “malinvestment”, and
its what happens when central banks flood the world with uneconomic
credit and governments override every semblance of financial
discipline and honest calculation via endless bailouts and safety
nets for gamblers.
So now China’s domestic hothouse has reached the limits of
credit fueled asset expansion. The great maw of its absurdly
overbuilt industries is already heaving
up deflationary gales on world markets. Its iron ore and
steel industries, for example, are literally crashing and
flooding markets with more cheap steel than has ever before
been imagined:
Ore with 62 percent content delivered to Qingdao sank 5.1
percent to $49.60 a dry ton on Tuesday, falling for a ninth day to
the lowest since April 13, according to Metal Bulletin Ltd. Prices
entered a bear market on Monday, dropping more than 20 percent from
a June high. On the Dalian Commodity Exchange, futures plunged 7.2
percent to a record low on Wednesday, while the August contract on
Singapore Exchange Ltd. fell to $42.20.
The trend echoes a similar one in steel in the second half
of last year, when Chinese exports of excess supplies sent prices
tumbling 30 percent. The nation’s aluminum industry quadrupled in
the past decade with smelters churning out record amounts of the
metal used in everything from packaging to car bumpers.
Metals including nickel and silver on the Shanghai Futures
Exchange fell to their daily limits, while rubber entered a bear
market. The volume of copper traded was almost six times the
three-month average. Steel rebar and iron ore, as well as eggs,
sugar and soybean meal dropped to the lowest level allowed by their
exchanges.
Beijing’s profoundly stupid attempt to keep the Ponzi going by
levitating the stock market is now coming home to roost
domestically, as well. An increasing number of car buyers in China
are canceling their purchases and risking forfeiture of their down
payments after the recent stock-market rout.
According to Cui Dongshu, secretary-general of
China’s Passenger Car
Association
, auto sales fell last month for the
first time
in more than two years:
“The plunging stock market is essentially a meat grinder,
shredding money meant for buying cars.”
At the end of the day, the firestorm now engulfing the China’s
stock market will shake the regime itself. China’s current maximum
ruler, Xi Jinping, is self-evidently an economically
illiterate thug. Accordingly, there is no measure he will not try
in order to arrest the current meltdown.
But as one observer noted, he has put the regime on the
line. When the current desperate measures finally fail, China
could well descend into social and economic chaos:
By urging households to buy stocks, Xi has put his
credibility—as well as that of the Communist Party—on the line. The
stimulus measures’ failure may incite outrage among those very
mom-and-pop investors who have lost everything. Though
it’simpossible to tell what might ignite it, mass social unrest in
China would shake the entire world.
The downside of that wager is profound indeed. The government’s
creation of the Chinese bull market has disproportionately
benefitted state-owned companies—and therefore the Communist
Party—by replacing government-guaranteed debt with equity. That
equity, of course, has been funded by the little guy—the second,
and much bigger, part of the problem. When the state press and
government officials began pumping stocks about a year ago, they
essentially made a promise to protect the savings of tens of
millions of households.
The ramifications of regime failure in China are surely
inestimable. But one thing is certain. The present worldwide
faith preached by Goldman and its imitators in the
ability of governments and their central banking branches to keep
the bubble expanding will suffer a fatal rebuke.
None too soon.