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China Stock Turmoil 2015
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Credit Suisse says the mainland is experiencing the third-biggest credit bubble, the biggest investment bubble and the second-biggest real estate bubble of all time. Photo: AFP

Beijing throwing everything at stock market because that’s easier than tackling triple bubble

Beijing may be throwing its all at the stock market not because that is its most important problem, but it’s the one it can most easily, if ham-handedly, control.

Intimidating short-sellers is, after all, a lot easier, and cheaper, than breathing life into a sagging housing market suffering chronic (and worsening) over-supply.

Allowing people to pledge their houses as collateral for the purchase of more shares is easier than managing the transition from over-investment to, well, whatever comes after.

Suspending trading in major issues, trapping investors, is easier, and quicker, than addressing the ways in which pledged shares are part of the expanding web of indebtedness on the mainland.

Beijing’s resolve to overawe markets into rising seems to harden daily.

Mainland media reported on Friday that the state-run China Securities Finance Corp (CSF) had received 1.3 trillion yuan (HK$1.6 trillion) in loans from banks, money which in turn will be made available for stock purchase loans through brokers.

China’s combination of a triple bubble remains the biggest risk to the global economy
Credit Suisse strategists

The previous week, CSF, not satisfied with rules that since last year have allowed brokers to issue short-term debt to fund margin loans for stock purchases, took the decision to allow those loans themselves to be securitised and sold to free up more capital for - yes that’s right - more margin loans.

All of this is most impressive, and though as policy it is deeply flawed and will have very high longer-term costs, in the shorter term it seems to be achieving something close to its aim. The mainland stock market, if such it can still be called, has stabilised.

But given the power Beijing has put into the exercise, that’s hardly a rousing success. Two weeks ago 21 brokers, presumably under inducement from authorities, pledged to continue to buy shares until the Shanghai index regained 4,500. But it remains around 4,000.

Beijing’s effort to control the stock market is best seen in the context of the difficulties it faces in controlling the rest of the mainland economy, which present problems just as deep but require solutions that may be much more difficult to engineer, or to endure.

“In our opinion, China’s combination of a triple bubble (with the third-biggest credit bubble, the biggest investment bubble and second-biggest real estate bubble of all time) remains the biggest risk to the global economy," Credit Suisse strategists led by Andrew Garthwaite wrote in a note to clients.

Take housing. Despite falling prices and sky-high valuations, with Beijing and Shanghai buyers paying average prices that are more than 20 times average incomes, supply continues to flow unabated. Housing starts on the mainland are running at 12 per cent above demand, according to a Credit Suisse estimate, and 18 per cent of completed homes become vacant.

It is not at all surprising that a housing bubble has gone hand-in-hand with a credit bubble, one that Credit Suisse calls the third-biggest it has seen, behind only Spain and Ireland during the last lamentable excess. The ratio of private sector debt to gross domestic product is not only nearly 200 per cent, but the rate of ascent has risen very steeply since 2011, taking it 40 per cent above trend. Bank for International Settlements research has found that many financial crises are preceded by credit rising by only 10 per cent above trend.

Investment as a percentage of output is now running at 44 per cent, compared with the peak of 36 per cent in Japan in the early 1970s when it was rapidly industrialising. Beijing recognises that investment-led growth is a process with a finite limit, and that the mainland economy must transition to one with higher consumption and services as opposed to exports and the laying of concrete over ground.

Given the excesses in the mainland economy, and the opaque but undoubted links between its banking system, its web of private, public and quasi-public debts and the stock market, a plunge must have been nothing short of terrifying for the authorities. Debt fault lines, as we’ve seen in other economies, run deeply but can cause much damage.

The reaction to the stock market crash may not be so much a matter of injured prestige, but of looking at the moving pieces and moving those over which Beijing has most control.

If there is one lesson of the last financial crisis, it is that it is easier to manipulate financial markets and hope reality conforms than to try to change reality and wait for financial markets to catch up.

Beijing has learned this point well.

Reuters

 

 

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