China

[imoldernu]

Second only to the US in GDP, the China Stock markets are significantly different than those of the US, as individual investors account for as much as 85% of trading, unlike the US and most other countries where professional money managers do most of the actual trades.

Because so much of the structure is different, it may be well to detail those differences to help in understanding how and why the Chinese markets may act differently than those of other countries, and to see risk in perspective.

Here's a current article that details some of the factors that should be watched as the markets seek stability.

China stocks fall again despite support measures | Reuters

In recent watching of the US TV networks, it looks to me as if many of the "experts" are playing catch-up while trying to understand the effect on the world markets. Some seem to think this is just a blip in a maturing market, while others present confused explanations and separate US Markets completely.

With Chinese Government controls currently seeming to be ineffective, many corporations are suing to halt trading, fearing crushing losses.

Unlike the US, Chinese government rules can require a time-hold on government support, meaning that government backing of funds can mean that recipients must "hold" the government backed entities for as much as a year.

China has bounced back from similarly disastrous problems in the recent past, so it may be premature to worry about a widening downturn, but understanding the way the Chinese markets work can't hurt.

edit to add.... In China, stocks represent 8% of household wealth. In developed nations, 20%.

[mpeirce]

I've been watching VWO (Vanguard Emerging Market ETF) which I won a little of (part of my international exposure). It's moving to a heavier weighting in China. Probably a good thing in the long term, though certainly bringing more volatility right now.


It's down about 5% this week.

(Greece is getting more news coverage, but to me China seems more important).

[Lakewood90712]

Haven't been watching the run up bubble , but sure am watching the meltdown, especially the Shanghai index. Many companies suspending trading.

Shanghai has about wiped out the entire gain spike. I'm sure fortunes have been made and lost. Consequences of government money interventions I suspect.

Makes Greek situation seem pale in comparison.

[clifp]

I was just going to start a thread on China, but imoldernu beat me to it.
WSJ is reporting that Chinese Shanghai market is down 1/3 since June and more than 4 trillion dollars have been lost on paper so roughly 20x the Greek bonds.

I took a look a several Vanguard and Schwab international ETF and it appears China is about 8% of broad international ETF like VEU or SCHF and 25% of emerging markets like VWO or SCHE. Which is real money for many of us I suspect.

The fact that Chinese Government is actively buying share of first large company shares and now small cap stock is pretty scary to me. I just don't think as general rule this ends well.

[marko]

Quote:

Originally Posted by Lakewood90712 Haven't been watching the run up bubble , but sure am watching the meltdown, especially the Shanghai index. Many companies suspending trading. Shanghai has about wiped out the entire gain spike. I'm sure fortunes have been made and lost. Consequences of government money interventions I suspect. Makes Greek situation seem pale in comparison.

As of this writing, "Greece" (economy the size of Rhode Island) has 462 postings on this forum. "China" (second largest economy in the world) has 3.

[imoldernu]

Without trying to explain the complexity of the Chinese Markets, likening them to US Markets may confuse the issues.
Many of the international news sources are going into great detail as to differences... and not all agree. Some of the major variances come in the way we interpret the same words and concepts. To one degree or another, here are some of the areas that can be confused.
Liquidity
Free Market
Government backing
Market manipulation
Margin
Financial entities versus individual investors
Leverage
Free Trade
Government regulated trade and timing standards
Trade suspension

Many in the media infer that the Chinese Government manages the market ala Greenspan, and Quantitative easing. Closer analysis shows that this is not so.
There is no Chinese equivalent to the Securities Exchange Commission and no easy recourse in law.
Public and private funding and entrepreneurial freedoms do not exist as we understand them. Manufacturing and housing is and has been governed and executed by the Chinese Government.

Where China goes from here is a good question. It has bounded back from seemingly impossible problems. The three to four (current ) trillion dollars in losses would seem to be a serious blow to the growth plan. Whether private or government debt, a considerable amount. China currently owns about 1.2 trillion of US debt. (The Federal Reserve owns 2.5 trillion)
.................................................. .................

All of this is just a result of my observations... trying to understand what kind of effect this may have... long term, on our national economy, and whether or not the country with second largest GDP will have direct ties with our own.

(aside) the amount of loss in the Chinese Market in the past two months is 15 times the total Greek debt... (according to CNBC this afternoon) (close to clifp's numbers)

[Mulligan]

Im sure the little man is getting killed, but if you had dumped all your money in the Chinese market as recently as March, you would not be out any money yet. Nobody in US is dumb enough to buy into an overheated market. We never do that here!


Sent from my iPad using Tapatalk

[clifp]

Quote:

Originally Posted by Mulligan Im sure the little man is getting killed, but if you had dumped all your money in the Chinese market as recently as March, you would not be out any money yet. Nobody in US is dumb enough to buy into an overheated market. We never do that here! Sent from my iPad using Tapatalk

The big problem that I see is the Chinese (both upper middle class new investor) and the Chinese government are really unfamiliar with stock markets. So you don't have a group of folks with grey hair (or no hair) who have been through the process of watching bubbles burst.


Bubble almost never end rationally with market going to down to a sane value, they almost always go to dramatically over sold. I just wonder if there will be any money left in China to prop up the market at the bottom, since the Chinese government seems to be determined to buy at the top.

[dunkelblau]

Quote:

Originally Posted by marko As of this writing, "Greece" (economy the size of Rhode Island) has 462 postings on this forum. "China" (second largest economy in the world) has 3.

Yes but Greece is the canary in the coal mine known as Europe, and I sense that recent events have deepened the split between the two factions.

As for the other side of the world, perhaps the capitalist roaders can learn from the Great Helmsman:
"Maybe you're afraid of sinking. Don't think about it. If you don't think about it, you won't sink. If you do, you will."

So which thaws first-- Greek bank deposits or trading in Chinese small caps? And who gets the bigger haircut?

[imoldernu]

Just one part of the problem that was explained in detail in the WSJ, two months ago. It has to do with margin buying and the way the market bubble was created.

Chinese Investors Are Staying on the Risky Margins - WSJ

Quote:

They are borrowing money to buy stocks and ride a rally that has seen the Shanghai Composite Index more than double in a year. The result is that households in China, with little debt, are effectively helping indebted Chinese companies. Kevin Zhang, formerly a senior manager at a state-owned company in Shenzhen, started with a five million yuan ($800,000) stock portfolio last year. He borrowed an additional 10 million yuan from his broker, and the value of his initial investment doubled in a year. But he isn’t satisfied. At a dinner for big investors arranged by his broker, Mr. Zhang found that several of them made 10 or 20 times their initial investment last year. These people had borrowed money from other channels, such as umbrella trusts, now banned, that allowed people to borrow up to 10 times their investment money. This year, Mr. Zhang gave up his stable job, with an annual salary of a million yuan, to be a full-time investor. Work wasn’t that busy at the state company, but it got in the way of trading. He says he came out of a meeting one day and found he had lost a year’s salary in an hour, so he decided he should focus on investments.

Was a private investor who quintupled his/her money in two or three months smart or lucky?
.................................................. .................................
This Harvard Business Review from four years ago may help to understand how China changed from what most Americans had been exposed to a decade ago. The picture of agrarianism lingers for many... Imagine going to sleep in New York City, and waking up in Shanghai, and not seeing any difference.

https://www.readability.com/articles/zygnfu6j

[Running_Man]

Quote:

The People's Bank of China has cut interest rates to a record low, brokerages have committed to buy billions worth of stocks, and regulators have announced a de facto suspension of new share listings. Dong Tao, chief economist for Asia excluding Japan at investment house Credit Suisse, said Beijing fears that the stock rout could undermine consumption, as people nursing losses are unlikely to go to the mall and spend. "That creates all kinds of risks for the economy and for the financial system and this is why Beijing is worried," he said.

The easiest way top get rich is to borrow as much money as possible and take a risk. If you go bankrupt it won't matter if you are bankrupt by 1000 dollars or a billion dollars so the more you can get the richer you can become. This is as true for an individual trader as it is for countries. It is the lender who needs prudence and ability to not lend into rampant speculation. For the last 6 years financial ministers of virtually every major country have been actively pushing for an increase in speculation while trying to give the impression of pushing for prudent lending.

For the Chinese financial ministers they have fallen to the assumption that stocks create the ability to have a good economy instead of the other way around. If you were a Chinese citizen and invested 100K yuan and purchased stocks with ultimate margin you would buy 200K in stock and if it doubled to 400K over the past year, and you continued to lever using the margin to buy more stock to 600K (300K stock 300K margin). You are up 200K in one year on 100K investment!!! Now when the market drops 33 percent and the portfolio is worth 400K again, you are going to have to sell 200K of stock to repay margin to point of 100K stock and 100K margin and you are where you started at. Sad truth is most borrowed the 100K to invest.

The problem was not that a billion Chinese started buying stocks, it is that the government allowed large margin purchases and a 100% runnup in a year thinking that was good for their economy. Now that the math they can see is as I described above they realize a lot of people are about to be wiped out. Whether by 1,000 Yuan or a billion Yuan doesn't matter to the individual they took a chance to get extraordinary wealth, but the creditors are about to get screwed and that is who the Chinese authorities are taking steps to protect

[Willers]

Quote:

Originally Posted by imoldernu Just one part of the problem that was explained in detail in the WSJ, two months ago. It has to do with margin buying and the way the market bubble was created.

Quote:

They are borrowing money to buy stocks and ride a rally that has seen the Shanghai Composite Index more than double in a year. The result is that households in China, with little debt, are effectively helping indebted Chinese companies. Kevin Zhang, formerly a senior manager at a state-owned company in Shenzhen, started with a five million yuan ($800,000) stock portfolio last year. He borrowed an additional 10 million yuan from his broker, and the value of his initial investment doubled in a year. But he isn’t satisfied. At a dinner for big investors arranged by his broker, Mr. Zhang found that several of them made 10 or 20 times their initial investment last year. These people had borrowed money from other channels, such as umbrella trusts, now banned, that allowed people to borrow up to 10 times their investment money. This year, Mr. Zhang gave up his stable job, with an annual salary of a million yuan, to be a full-time investor. Work wasn’t that busy at the state company, but it got in the way of trading. He says he came out of a meeting one day and found he had lost a year’s salary in an hour, so he decided he should focus on investments.

Sounds exactly like my BIL, vintage 1999. He tried to convince me to quit my job and go into day trading with him. I told him I promised to do that if he was still doing it in three years (2002). Needless to say he's back working and isn't talking about retirement any time soon. I fear that Mr. Zhang is likely to suffer the same fate.

[Fermion]

Ever since getting burned in the China fraud stocks several years back, I stay miles away from any Chinese stock.

I would short them, but the put options trade for insane premiums. Even so, somebody tripled their money over the past couple of weeks buying those puts.

[clifp]

Man the more I read about the Chinese market the scarier it gets.

From today Journal
The Man Tasked With Stopping China’s Stock Selloff

Quote:

BEIJING—As Chinese stocks reached another in a string of highs on June 12th, the nation’s top securities regulator, Xiao Gang, suggested to an elite group of Communist Party officials that the market still had room to climb. The next day marked the start of China’s worst market downturn in years. ... “Unlike in the U.S., the Chinese securities regulator is still held accountable for the level, rather than mainly the integrity of markets,” said David Loevinger, a former U.S. Treasury official focusing on China... Then, it unleashed a $586 billion plan to shield China from the global financial crisis. Now, it is pumping up the stock market as a way to fix the debt woes that resulted from that stimulus. The idea has been that by selling shares to the public in a rising market, many heavily indebted state-owned enterprises would be able to pay off their debts and avoid having to rely on the state for a bailout. ... Critics say Mr. Xiao failed to effectively rein in ballooning loans to finance stock purchases. Such margin borrowing surged nearly fivefold over the past year to about 2 trillion yuan (US$323 billion) last month. The regulator did try to put a lid on margin financing several times this year, but when the markets dropped as a result, it quickly reversed course. Most recently, on Friday, an order signed by Mr. Xiao started allowing investors to borrow against their homes to buy equities. The measure came just weeks after the agency warned investors of the risks associated with such borrowing, and promised to tighten supervision over margin financing.

Man this just jaw droppingly stupid stuff. Encouraging average Chinese to borrow against their home equity to invest in the over valued market. What possibly could go wrong in this scenario.

[Free To Canoe]

Quote:

Originally Posted by marko As of this writing, "Greece" (economy the size of Rhode Island) has 462 postings on this forum. "China" (second largest economy in the world) has 3.

I would comment on China but it's all "Greek" to me.

[Free To Canoe]

All kidding aside, I have been following this with great interest. I put an order in to reduce my EM holdings, the China weighted stuff (and the most volatile).

If and when this bubble pops, I think everyone will be affected.

[easysurfer]

Looks like you can get in, but can't get out. At least for 6 months .

Quote:

China's securities regulator took the drastic step of banning shareholders with stakes of more than 5 percent from selling shares for the next six months in a bid to halt a plunge in stock prices that is starting to roil global financial markets. The China Securities Regulatory Commission (CSRC) said on its website late on Wednesday that it would deal severely with any shareholders who violated the rule.

China bans big shareholders from cutting stakes for next six months | Reuters

[clifp]

Quote:

Originally Posted by easysurfer Looks like you can get in, but can't get out. At least for 6 months . China bans big shareholders from cutting stakes for next six months | Reuters

I know us Westerner have done more than our fair share of stupid things both as individual, exchanges, and as government. But every time I read another story about China's market just seems more and more crazy, its like somebody gave them a Book 23 stupid things not to do when running a stock market and they got confused and decide to do all of them at once.

[NW-Bound]

China has not had much experience with capitalism and equity market. And its ban on investing abroad for its citizens causes them to pile on to the domestic housing and stock bubbles. The thrifty Chinese who make the Japanese look like spendthrifts have no other places to invest their savings. Their consumption is only 35% of GDP, compared to 75% in the US. They save so much because they cannot count on their gummint to take care of them in the old age, nor on their offspring due to the one-child policy.

It's the reverse of the Greek's problem. I think both problems are caused by their governments.

[tmeeker]

Quote:

Originally Posted by Fermion Ever since getting burned in the China fraud stocks several years back, I stay miles away from any Chinese stock. I would short them, but the put options trade for insane premiums. Even so, somebody tripled their money over the past couple of weeks buying those puts.

I like tangibles like real estate, brick and mortar buildings, things I can hold, feel and taste.