Financial Meltdown - Day two - 08/24/2015

China's stock market plunges for the fourth straight day

http://www.vox.com/2015/8/23/9195891/china-stock-market-crash

Javier Zarracina / Vox.com

• China's benchmark Shanghai Composite Index is down 4.4 percent in Tuesday trading.
• The market has lost 19 percent of its value in four straight days of losses. It's down 40 percent from its June peak.
• Over the past two months, the Chinese government has taken extreme measures to reverse the stock market's decline — but these measures now appear to be failing.

China's stock market had a debt-fueled boom, followed by a crash

Between June 2014 and June 2015, China's Shanghai Composite index rose by 150 percent. A big reason for the stock market rally was that a lot of ordinary Chinese people began investing in the stock market for the first time. More than 40 million new stock accounts were opened between June 2014 and May 2015.

RelatedThe August stock slide, explained

And many have been buying stocks with borrowed money. The Chinese government used to strictly limit this practice, but over the past five years the government has gradually relaxed those regulations.

Earlier this year, the authorities became concerned that the stock market's rise had become unsustainable. So they began to tighten limits on debt-financed stock market speculation. The stock market peaked in June and then began to fall quickly.

Efforts to prop up the market haven't worked

By early July, the market was in free fall, and the Chinese government began to panic. Authorities took a number of steps to push stock prices back up:

• The central bank provided more cash to the China Securities Finance Corp, a state-run company that lends people money so they can buy stocks.
• Initial public offerings were suspended, so that newly issued shares wouldn't compete for capital with those already on the market.
• Companies' major shareholders — those with more than 5 percent of a company's shares, as well as executives and board members — were banned from selling shares for six months.
• China's securities regulator ordered companies to either buy their own shares or encourage their executives or employees to do the same.

Those efforts seemed to work for a few weeks. The Shanghai Composite rose from the July 8 low of 3,507 and seemed more stable. But that proved to be a temporary reprieve. Last week, the market began to plunge again.

Once again, China tried to prop up the stock market, announcing that a major state pension fund will be allowed to invest in stocks for the first time. But the market was unimpressed with the announcement.

According to the Financial Times, the Chinese authorities finally concluded this weekthat propping up the stock market would be too expensive. The government spent more than $200 billion buying Chinese stocks since early July, and faced the prospect of continuing to spend at that rate indefinitely to keep the market from crashing.

No government likes to see its stock market crash, but the plunging Shanghai Composite will be particularly embarrassing for the Chinese authorities. Positive coverage from state-run media helped fuel last year's stock market boom, and last month's decision to intervene in the stock market tied the government's prestige even more tightly to the market's performance.

The Chinese economy is struggling

The broader Chinese economy isn't doing very well either. Official figures show the Chinese economy growing at a 7 percent rate in the second quarter. That's slow by Chinese standards, and many Western economists suggest that the official figures overstate China's growth.

Weak Chinese growth has exerted downward pressure on China's currency. The Chinese central bank allowed the currency to fall by 3 percent earlier this month.

For the past two decades, China has benefited from an export-oriented growth strategy. But exports can't power China's growth forever — world markets just aren't big enough. So China needs to transition to an economy that's powered more by domestic consumption. And as Vox's Max Fisher has written, the economic reforms required to facilitate that won't be easy.

From the Guardian

Asian stock markets recover with big swings after Wall Street slump – live

• Chinese markets down 6% at opening
• Wild swings on Asian and Australian markets
• The Dow plunges 588 points in New York
• FTSE100 in London loses 4.5%
• Why China is affecting global markets
• Turmoil raises doubts about rate increase by US Federal Reserve

• Shares in meltdown after China’s Black Monday – as it happened

Chinese Stocks Are Crashing; Yuan Devalues, Deposit Rate Spikes To Record High, Japan Denies "G7 Response" Planned

Zero Hedge,
24 August, 2015



Following yesterday's bloodbath (and the continued carnage around the world), AsiaPac stocks are lower with Japan unable to mount any sustained bounce despite every effort to lift JPY. The propaganda-fest is in full swing as Amari claims JPY is safe-haven asset and Aso denies any coordinated G7 response is being planned (which means they are all feverishly trying to figure out how to 'save' the world again from a 4-day stock drop). China is ugly with stocks down hard in the pre-open (CSI-300 -4.3%) as offshoreYuan depo rates spike to 22.9% - a record high - as liquidity outflows must be accelerating (as PBOC adds another CBNY150bn liquidity). China devalues Yuan 0.2% - most in 11 days.

Carnage -

• *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 6.4% TO 3,004.13
• *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 6.3% TO 3,070.01

This is the 5th day of crashing Chinese stocks in a row...

Chinese Stocks are down 14% since Friday!!

Year-to-date, Shangahi is now down 6.2% and CSI-300 (China's S&P) is down a stunning 15%!

Where China will stop (or atleast aim for) - when QE-Lite (PSL) was unleashed...

The Japanese are in full propaganda mode...

• *SUGA: WATCHING MARKET MOVES ATTENTIVELY
• *ASO: FX MOVES HAVE BEEN ROUGH ("rough" - well that's one word for complete and utter carnage)
• *ASO: CONTINUING TO CLOSELY WATCH MARKET MOVES
• *ASO: I HAVEN'T CONTACTED U.S. TREASURY (which means he has!)
• *ASO: NOT AT STAGE FOR G-7, G-20 RESPONSE (which means there is)
• *AMARI: UP TO BOJ TO DECIDE ON ADDL EASING (how's that last QQE2 working out?)
• *AMARI: YEN IS BEING BOUGHT AS SAFE ASSET (nope it's a forced carry unwind sorry!)
• *AMARI:YEN SEEN AS SAFE ASSET SHOWS VALUATION OF JAPAN ECONOMY (what utter crap!)

So we await the coordinated response to the global vicious circle of carry unwinds and forced liquidations... but remember, RRR cuts so far have done absolutely nothing to hold back wave after wave of frenzied malicious Chinese sellers just wanting out of the ponzi.

The talk is not working as Chinese stocks are weak in the pre-open...

• *FTSE CHINA A50 SEPT. FUTURES DROP 3.4% IN SINGAPORE
• *CHINA CSI 300 STOCK-INDEX FUTURES FALL 4.3%
  
  

Some good news... China is deleveraging...

• *SHANGHAI MARGIN DEBT DECLINES TO LOWEST IN FIVE MONTHS

As China devalues Yuan by most in 11 days..

• *PBOC WEAKENS YUAN FIXING BY 0.2%, MOST SINCE AUG. 13
• *CHINA SETS YUAN REFERENCE RATE AT 6.3987 AGAINST U.S. DOLLAR

And China adds yet more liquidity...

• *PBOC TO INJECT 150B YUAN WITH 7-DAY REVERSE REPOS: TRADER

The desperation to keep liquidity from flooding out is very evident:

• *ONE-WEEK OFFSHORE YUAN DEPOSIT RATE JUMPS 840 BPS TO 22.9%
• *YUAN DEPOSIT RATE HEADED FOR RECORD CLOSE IN HONG KONG

"Some are converting yuan back into USD or HKD amid the devaluation,’’ says Lawrence Kung, head of deposits department at Wing Lung Bank in Hong Kong

*  *  *

Hope continues for a huge broad-based RRR cut but The PBOC - just as it said - remains fixed on small targeted liquidity injections. This will not please the 'people' or Jim Cramer... "they know nothing."

*  *  *

And finally, we could not have put it better than The Onion as they explain how the "Shoddy Chinese-Made Stock Market Collapses"...

Proving to be just as flimsy and precarious as many observers had previously warned, the Chinese-made Shanghai Composite index completely collapsed Monday, sources confirmed.

 

“Sure, it looked fine from the outside, but anybody who saw it up close knew that it was of such poor quality that it wasn’t built to last,” said Allen Sigman of the London School of Economics, adding that the stock market, which he described as a crude knockoff of Western versions, was practically slapped together overnight and featured countless obvious structural weak points.

 

“They pretty much ignored regulations, and inspections were a joke. The only surprise is that it didn’t fall apart sooner.” Sigman added that he just hopes there weren’t too many people who were hurt in the disaster.

*  *  *

We assume that is satire... though it does seem a little too real.

Coming To America? China Censors Bad Market Talk Amid Meltdown

Zero Hedge,
24 August, 2015



Back in July, after a dramatic unwind in the half dozen or so backdoor margin lending channels that had helped drive Chinese stocks to nosebleed levels triggered a terrifying 30% decline (vaporizing billions in paper profits in the process), the Politburo predictably stepped in to rescue the market. 

However, when it started to become clear that a succession of declarations, directives, policy rate cuts, and even threats weren’t going to be enough to alleviate the pressure on equities, Beijing looked to take back the narrative by banning the use of certain undesirable phrases.

Here’s what happened (as detailed in "China Bans Use Of Terms 'Equity Disaster' And 'Rescue The Market'"):

Although it’s not possible to know exactly what the mood is among Party officials in China regarding the inexorable slide in stock prices that’s unfolded over the course of the last three weeks, it’s reasonable to assume that at least some officials in Beijing are in the throes of Politburo panic after watching some $3 trillion in market value disappear into thin (and probably polluted) air. 

 

Amid the turmoil, China has resorted to an eye-watering array of policy maneuvers, pronouncements, and plunge protection schemes aimed at arresting the slide.

 

Nothing has worked.

 

Not suspending compulsory liquidation for unmet margin calls, not billions in committed market support from brokerages, not a PBoC backstop for the CFSC, and not even a ban on selling by the Social Security Council. 

 

And so, with every attempt to manipulate the market higher falling flat in the face of selling pressure from the hairdresser/ farmer/ banana vendor day trading crowd (which has now thrown in the towel on the whole “it’s easier than farm work” theory and now just wants to break even and head for the hills) the only thing left for China to do is “fix” the narrative.

 

In other words, when banning selling doesn’t work, the logical next step is to ban talking about selling. As FT reports, one domestic journalist, who did not want to be named, said the government had banned local media from using the terms 'equity disaster' and 'rescue the market' in their reports on the stock market."

Given the above it shouldn't come as a surprise that after Chinese stocks collapsed overnight, Beijing has reportedly banned discussion and forbade "negative market reports."

BREAKING: Chinese authorities issued notice to state media to censor negative market reports following #BlackMondaypic.twitter.com/hQ6vbksYtw

— George Chen (@george_chen) August 24, 2015

So with the censorship machine in high gear, Xi Jinping had better hope that Beijing can at least still exert some control over the narrative because as we saw over the weekend when angry investors captured the head of Fanya Metals Exchange, and as is clear from the outcry surrounding the chemical blast in Tianjin, the public is restless, and the collapse of the stock market might just be the catalyst for social upheaval.

Down-Under, in Australia and New Zealand the punters are pretty confident that there is no crisis and this is 'just a correction'. They can't help themselves and invest in bargainйs like there's no tomorrow (which there isn't)

NZ shares pull out of China nose-dive

New Zealand share prices pulled out of a China-inspired nosedive today, assisted by a degree of stability returning to the Australian market, and as bargain hunters moved in to take advantage of improved value throughout the region.

By 2.30 pm the local market, which earlier had fallen by 2.4 per cent on the S&P/NZX50 Index, had levelled out, to be just 9 points down at 5,598.

Australia's All Ordinaries Index, after a sharp fall on Monday, gained 2.2 per cent, Hong Kong's Hang Seng Index was up 2.5 per cent, Taiwan's TAIEX index was up 2.3 per cent and Japan's Nikkei 225 was level.

ASX rallies as bargain hunters jump in

Australian investors are enjoying an unlikely bounce on Tuesday, with the local index at first plunging beneath 5000 for the first time in two years before powering through a strong comeback during the morning.

Even a sharp drop in Chinese markets when they opened failed to dent the rally in local shares.

How will China's woes affect NZ?

China's volatile sharemarket plunged yesterday, causing financial turmoil around the globe, but what does it mean for the New Zealand economy?

Radio NZ,

25 August, 2015

The mainland benchmark index, the Shanghai Composite, closed down 8.5 percent yesterday - after large losses last week. Over the past week, the index fell 12 percent, adding up to a 30 percent drop since the middle of June, leading to a sharp fall in currencies and commodities around the world.

The most immediate effect of China's woes could be seen on trading floors around the globe, with falls inevitable when the brakes go on the world's second largest economy. The Dow Jones in the US closed nearly 4 percent lower overnight, while the UK's FTSE 100 was down 5 percent - its biggest weekly loss this year.

In Australia, the ASX 200 suffered its worst one-day fall in four years, shedding 4.1 percent and wiping $A64 billion from the market.

New Zealand is not immune to these kinds of global moves, with the NZX 50 down 2.5 percent yesterday, and further falls occuring when it opened this morning. But the country is also better placed to ride out the storm than many of China's other big trading partners.

Mark Lister, the head of private wealth research at Craigs Investment Partners, said New Zealand was not as affected by oil and commodity prices, which are at the centre of the stock market fall overseas.

He told Morning Report today that long-term investors, including those in Kiwisaver, could even take advantage of the fall.

"For people who are investing with a 20-30 year view, or even a 10-year view, they should actually look forward to periods like this. When you're investing in Kiwisaver every payday, you actually want these periods of weakness so you can do your buying while there is panic in the market, and while everything looks heap."

Prime Minister John Key also reassured Kiwis today, saying that New Zealand was well placed to withstand any pressures that may arise from the Chinese volatility.

He said there was a difference between what was happening in China on the construction and investment side, and the consumer demand side.

"Our exporters are much more heavily focused on the consumer demand side, selling food and a number of other products to them.

"Australia's economy, for instance, is much more heavily focused on the investment side, so it's arguably a bigger deal for Australia than New Zealand."

A course correction

Many economists see the current falls in the chinese markets as a correction, after months of rapid growth in the markets. Duke University economist and business professor Campbell Harvey told Nine to Noon today that even with a 8.5 percent dip, it would need to drop another 30 percent to get to the same level it was at this time last year.

He expected further corrections to come, and also pointed out that China has massive money reserves, totalling trillions of dollars, giving it "plenty of firepower" to deal with crisis.

Listen to Professor Campbell Harvey on Nine to Noon ( 20 min 2 sec )

Last month, BNZ senior economist, Craig Ebert said the Chinese equity market had been on a "ballistic move" since the start of the year.

"I think it just got so much of a head of steam it [Chinese officials] just had to step in and say enough is enough and put in some policy measures to nip it in the bud."

He said the fact that the Chinese stock market essentially doubled in the first few months of this year, while the Chinese economy demonstrably slowed down showed "disengagement" between the equity market and the general economy.

Longer term outlook

New Zealand's two-way trade with China, worth $20 billion, and the longer-term outlook for New Zealand if China continues to struggle is still reasonably optimistic.

It's true, China is the biggest foreign player in New Zealand's dairy sector, and is the second biggest overall investor in New Zealand with 14 percent of all overseas investment in 2013-2014.

The New Zealand dollar is also particularly vulnerable to Chinese fluctuations - after China devalued its currency earlier this month, the New Zealand dollar dropped - and the latest volatility saw the Kiwi touch 62.44 US cents overnight, its lowest level since July 2009.

The Chinese devaluation also made it harder for our exporters to sell into China.

However, Professor Harvey said while he expected further "carnage" in the markets today, New Zealand's exposure to China's volatility had both good and bad outcomes.

"For imports, it is New Zealand's most important trading partner, but as China devalues, the imports become cheaper."

And he said the type of exports New zealand sent to China were the ones that were least likely to be affected by the turmoil.

"China has to eat, and eating habits are not as volatile as the demand for copper or iron ore for industry, so it means you're more protected.

"And if you really think about it, one of the primary imports is petroleum, and that price is plunging, that's also a good thing for New Zealand."

And the director of a Chinese research centre in this country said the volatility of China's economy could drive more of its investors to spend up in New Zealand.

New Zealand Contemporary China Research Institute director Bo Zhiyue said investors may find the Chinese market to be too volatile at this time.

"They may want to find a new outlet for their investment and their capital, and I think Australia and New Zealand are perfect targets."