
China's stock market crash: A red flag - anigbrowl
http://www.economist.com/blogs/freeexchange/2015/07/chinas-stockmarket-crash
======
Pyxl101
Limitations on short selling always concern and perplex me. Why is that a good
idea? Isn't that preventing the market from properly adjusting to whatever
circumstances have occurred, or new information that has arrived? Limitations
like this feel like "Let's all pretend that the truth isn't true".

It astonishes me that in this day and age there are still so many arbitrary
controls on marketplaces, such as the Greek stock markets shutting down due to
their financial crisis. Isn't it important for the market to adjust and
properly accommodate those events? (If the market simply cannot function due
to the crisis itself, then that makes sense. I assumed it was shut down
because people are afraid of how prices will change as a result.) Sure, some
people might panic in an unreasonable way, and if they do, they will get taken
to town by other people who go long during the same time period. Just like
people who are overly confident will be taken to town by short sellers if
there's a bubble and it bursts.

I understand why there are controls on the marketplace like around prohibiting
naked short selling, or reversing transactions that were obviously erroneous,
but controls like preventing short selling seem absurd. If someone wants to
bet that prices will decrease, let them! That's an important signal and an
important correction to the market. Perhaps we would have fewer market bubbles
if there was more continuous correction.

Is anyone working on a bitcoin-based stock market with no limitations on
trading? Could such a thing be legal? Perhaps actual shares of stock are not
being traded, but rather some other kind of financial instrument that
represents the right to the upside or downside of some shares without having
to own them, but you own the upside or downside. Then the idea would be that
anyone can buy these instruments using currency or bitcoin on a market that
operates differently than today's conservative markets.

I imagine this is probably illegal for a variety of reasons, such as "know
your customer", but it's interesting to think about. How would the stock
market be different if trades were unregulated, in the sense that there are no
limitations on buying and selling shares. It operates 24/7 and never shuts
down no matter what happens, and never imposes constraints on selling or short
selling. I imagine this market would need to operate as a central authority or
federation of trusted brokers (someone needs to verify that the seller
actually owns the shares they've promised to deliver), but the authority or
brokers would be willing to transact in both regular currency and bitcoin.
Would this be a more effective market, or a dysfunctional one, and why?

~~~
dflock
This would be true if people always behaved like Econs, not Humans. In normal
times, the mass market averages out irrational behaviour (and there's less of
it when things are calm) - but, occasionally the herd stampedes. Perhaps it's
better in these cases to slow the panic until things calm down and people
start behaving more rationally again.

There are also cases where people individually rationally maximizing their
individual financial interests is, collectively, devastating for society as a
whole.

Continuous adjustment sounds great, but sometimes we get crashes, which
aren't.

~~~
georgebarnett
It's curious that there's only intervention in the markets when they're
tanking. If the underlying reason for the intervention is to prevent
irrational behaviour then where was the regulator when the price was going up
like wildfire? Surely it should work both ways?

~~~
lkrubner
There are many, many regulations that limit the rise of the markets, the most
obvious being the limits put in place on credit and margin. All Western
governments intervene in the various stock markets, everyday. That's been true
since at least the 1930s. The interventions are sometimes direct, but are more
typically indirect.

These last 40 years there has been a movement afoot, especially in the English
speaking nations, to weaken the controls that limit the spikes, up and down,
in the market. There may be some advantages to this policy, but there are also
many disadvantages.

------
smaili
Note: I'm not an economics expert by any means, so go easy on me :)

I'd just like to ask why in situations like this, governments tend to
intervene? In the long term, wouldn't it actually be better to let the market
just naturally figure itself out? That way the end prices reflect the real
value.

~~~
lmm
A free market can't handle limited liability. It's only government
intervention that can provide things like orderly bankruptcy proceedings. If
the government is obliged to be a lender of last resort then it seems
reasonable for it to take less binary steps before that eventuality.

~~~
tomp
> A free market can't handle limited liability. It's only government
> intervention that can provide things like orderly bankruptcy proceedings.

Obviously. And it's the government that actually establishes the free market,
regulates it, and provides all the surrounding infrastructure (roads, police,
courts, ...).

A "free market" doesn't mean that you can do whatever you want - the name for
that is "anarchy". Free market only means that everybody is free to compete
under equal terms. Additionally, governments would step in if a single player
got too powerful and would exert its power in ways that would undermine
competition.

------
tokenadult
The _Los Angeles Times_ reporting about the first two days of trading this
week in China[1] is also interesting for perspective on how the stock market
in China influences the broader economy of China. The key idea is that the
current situation, even WITH government intervention, is very likely to
severely hurt the personal savings of a lot of households in a country with a
strong tradition of personal savings. That could turn many well educated,
high-earning people who were previous supporters of the Communist Party of
China leadership of China into doubters about their government or even regime
opponents.

The CNN report based on official media reports from China strongly suggests
many economic upheaval from the current intervention in the stock market in
China.[2] The most dynamic and innovative companies in China are those most
likely to be unable to raise further investment funds.

[1] "It's a bumpy ride for China's stock market investors"

[http://www.latimes.com/world/asia/la-fg-china-stock-
market-2...](http://www.latimes.com/world/asia/la-fg-china-stock-
market-20150707-story.html)

[2] "Nearly 25% of Chinese stocks have stopped trading"

[http://money.cnn.com/2015/07/07/investing/china-stock-
market...](http://money.cnn.com/2015/07/07/investing/china-stock-market-
companies-stop-trading/)

------
jamespitts
The shadow banking sector in the mainland worries me more than anything else
in this emerging situ. It is an information problem, but magnified by the
potential for political distortion or simple opacity. In freer societies, the
issue is merely a gap between expectations and emerging reality, and we know
how extreme even that can get.

A lot of firms may be severely impacted by this share price collapse, both
financial and non. More alarmingly, "shadow" bank failures may occur unseen,
or structural problems that would normally be covered or speculated about by
the media suddenly rear their head. We may only find that large sources of
financing vanish long after the fact.

Many expect the CCP to swoop in and save the day, but perhaps it chooses to
not do so, or do something more extreme than changing some rules or commanding
the buying of shares in the big indexes.

------
jamespitts
How to get a read on mainland stock prices:

Over the years I have used FXI to watch general stock prices in China. But FXI
only indexes the large cap stocks listed on the Hong Kong Stock Exchange.

Since the mainland stocks began reversing after the extreme price rise, I
found the Shanghai stock exchange composite to be far more useful than FXI. To
get the current price, use "Deutsche X-Trackers Harvest CSI 300 China A-Shares
ETF":

[https://www.google.com/finance?q=NYSEARCA%3AASHR&ei=Uj6cVcG4...](https://www.google.com/finance?q=NYSEARCA%3AASHR&ei=Uj6cVcG4AsjFigKxxJKgAQ)

Any ideas about how to easily get the price on an index covering the Shenzen
stock exchange?

~~~
jdhawk
SICOM:IND and SZCOMP:IND?

[http://www.bloomberg.com/quote/SICOM:IND](http://www.bloomberg.com/quote/SICOM:IND)

[http://www.bloomberg.com/quote/SZCOMP:IND](http://www.bloomberg.com/quote/SZCOMP:IND)

~~~
jamespitts
Excellent -- thanks!

------
vegabook
Inevitably, whenever The Economist (or the press in general) latches onto a
markets story, it's because everything is already in the price. Shorts should
be taking profit here, because the journos are usually the last to know.
Recall, this is the paper which wanted to sell gold at 300, and wanted to sell
oil at 11.

~~~
leoc
Bet you $5.

~~~
vegabook
Bet me what? That SHANCOMP will go lower from here? And I assume you already
know that your payout will be skewed: options price in a higher chance of
downside than upside already so you should probably pay me $7 if it rallies
against my $5 liability if it falls. Point is: this "China is tanking" idea is
on everybody's lips and the surprise risk is now a rally.

~~~
leoc
> our payout will be skewed: options price in a higher chance of downside than
> upside already so you should probably pay me $7 if it rallies against my $5
> liability if it falls

No doubt, but the market in Hacker News Shanghai Composite side-bets is not
big and liquid so you may not be able to find someone to offer you $7, and if
you're that confident in your thesis you should be willing to accept $5 in
that case. ;) It's OK though, I'll go to $7.

(I didn't downvote you btw.)

~~~
vegabook
Looks like I owe you five bucks (as of 8am London time) ;-)

Assuming $2.50 market in upvotes, duly upvoted you twice! ;(I'll wear two
downvotes if you want to be strict about it).

------
curiousjorge
How can we, as North Americans, profit from China's demise? Is there a Chinese
index that I can short? Because it sure as shit not going to go back up, not
after the recent announcement of buying up bad chinese stocks.

~~~
vegabook
Just sell some aussie dollar or for the brave, buy USDZAR. Much more liquid
than the stocks, and exposed to all the second order factors which are already
priced into stocks but not yet into the the implications for currencies: lower
commoditiy prices, structurally lower demand for Australia's output, less
Asian capital investing in the country.

The ZAR angle gives you exposure to a possible slowdown in the huge Chinese
investment in Africa, plus the dire politics in SA. The downside is people are
already short the unit.

~~~
curiousjorge
I also thought about shorting Canadian banks, especially Vancouver, the joke
is that there's not many corporations traded on stock exchange, but I feel
like the Chinese economy crashing would send ripples here where Chinese money
is keeping BC afloat, especially when the real estate bubble here pops, we
will see vast majority of homeowners using debt to make payments default.

~~~
vegabook
Yep decent strategy I would think. The idea is to find the second order
implications which are not yet priced in. The first order "China is slowing
down" is already in the price of the pureplay indices, and as you point out
above, the implied downside vol is now much higher than the upside as a
result.

~~~
7Figures2Commas
Playing the collateral damage is always a wise strategy to consider, but it's
also worth considering the possibility that the decline has a lot further to
go.

In hindsight, prices today might look like ideal entries for short positions
months from now if this is just the beginning of a major decline. In markets
like this, no action should be taken without a thorough fundamental and
technical analysis. Making an ill-researched assumption one way or the other
will cause a lot of people on both sides of the market to lose money.

~~~
vegabook
Both sides cannot lose money simultaneously, by construction of the financial
markets. +1 - 1 will always equal zero. Not -2.

If your point is that "it always goes back to the fundamentals" and therefore
fundamentally-driven investors will always win in the long run, I put to you
that there is so much accumulated capital over centuries in Europe, that the
ECB can wield this to fight the fundamentals for far longer than you can stay
solvent.

Consequently:

When we're in a regime-shift scenario, as now, fast decision making is a much
better value-adding skill than weeks of fundamental analysis which can be
swept aside at the whim of a policy maker.

Therefore I completely disagree with you. Those who are currently holding on
to fundamental analysis are losing money hand over fist in a market which
values connections and reading of policy maker tea leaves. I give you as
evidence, the EURUSD exchange rate. Here is the most liquid series on earth,
and one which is barely moving on fundamentals, namely the existential crisis
which the euro itself is facing. It is manipulated and no amount of
conscientous fundamental analysis will help. Instead fundamentals will just
bog you down in irrelevant detail and a false identification of the drivers.
Techs, positioning, and fast moving gut feel is what matters in this market.

Basically: there is no definitive winning formula in finance. You have to use
your instinct and flit between strategies as the state of the world requires.
Sometimes that's fundamentals. Right now it isn't.

~~~
7Figures2Commas
> Both sides cannot lose money simultaneously...

You're being far too literal here my friend.

The instruments you use, your timing, horizon, leverage, money management,
etc. all affect your ability to _realize_ gains, even if your overall
investment or trading thesis is correct. For instance, I could be on the right
side of a trade but a margin call could screw it all up.

When all is said and done, people playing China long and people playing China
short will both end up losing money during this volatile period. Not because
they were all wrong about what was going to happen but because many of them
won't be positioned perfectly or have the wherewithal to see their positions
through.

> If your point is that "it always goes back to the fundamentals" and
> therefore fundamentally-driven investors will always win in the long run

I wrote "In markets like this, no action should be taken without a thorough
fundamental and technical analysis." How in the world did that lead you to
conclude that I was arguing "'it always goes back to the fundamentals' and
therefore fundamentally-driven investors will always win in the long run"? Why
did you completely ignore my reference to technicals? It seems you're
searching for an argument that doesn't exist.

------
fokinsean
First Greece, then China, coming up soon is Puerto Rico, is the US next?

------
x5n1
yes just like 'murica's debt. command economies don't play by any given set of
rules. they make their own rules. as long as there is demand in the world for
chinese goods, the chinese economy will continue to function.

~~~
fennecfoxen
I don't know how much that's true.

China's current economy is built on the impact of its 1-child policy on its
historical culture of children taking care of elderly parents: that's really
really hard to do now, so everyone saves like crazy, and the government uses
those savings (in state-run banks) to finance state-run industries with below-
zero real interest rates, which are of course wildly profitable, and the
plutocratic elite splurges on its take of the surplus.

But they really need to watch out for a number of shocks, of the whole scheme
could fall apart badly and spark social unrest. In particular, inflation
(eating away at those savings) sometimes leads to riots, and their monetary
policy has been very extreme for many many years. (In different ways than US
policies, but still, makes "Helicopter" Ben Bernanke's interventions look like
the amateur leagues.)

Economists continue to worry and it's not 100% clear that China will continue
to function after a real economic crisis. They might, but it's really hard to
tell (they're so opaque it makes detailed analysis impossible).

~~~
x5n1
What if I was to tell you that all the money that you deposit in the banks is
not used for anything. The banks borrow money using a credit lending window
from the central banks. They can get as much money as they want. Money doesn't
actually exist. It's a virtual method of coercion to get people to do things.
As long as there are things for Chinese people to do, the Chinese economy will
keep running. As long as China can source raw materials and sell them for a
markup to someone else, the Chinese economy will keep running. At the end of
the day even if robotics threatens the Chinese economy, the government can
step in and stop robotics from destroying jobs. That's the level of control
they have. Any problems that they will have economically, everyone else will
have first.

Most of these pundits that run Western economies follow rules that they
themselves make up, and then use those rules to control other people. But
China don't play these games homie, China knows the game homie. China make its
own rules.

~~~
jerf
China may make its own rules, but reality gets a veto.

I'm perfectly even-handed with that assessment... it 100% applies to _any_
economy, of any form.

~~~
x5n1
> but reality gets a veto.

Are the Chinese working as hard as American workers? Are they productive
people that produce a lot of economic output? If the answer is yes, then there
is nothing reality can do for you.

~~~
jerf
I was talking about reality, not my opinions about reality. Real reality, if I
must qualify it. Where logic and reality part ways, reality wins. China may
make all the rules it likes, but reality stays real.

If you are dismissive of reality's impact on, ah, reality, well, I appreciate
your candor, but please don't be surprised that I just mentally dropped your
credibility score to zero.

~~~
x5n1
I don't know what you are rambling about? What are the real constraints in an
economy? Resources. That's about it. Everything else is virtual.

