The price drop is a price drop. I don't think we can add too much useful commentary to it.
The politics of it, well that is interesting. The Chinese government is acting a little panicky. Suspending trading, banning "malicious" selling, state supported margin loans.
It makes me think that they may have taken on the pundits' belief that the chinese public will support the CPC regime only as long as rapid economic growth is part of the package, that any economic troubles will result in regime change.
Well put. However, you have to question the assumption that a stock market crash affects the economy in a significant way. For example, it would make sense if a lot of savings were lost, because that would affect consumption. However, that's not the case. As the Economist pointed out - "Less than 15% of household financial assets are invested in the stockmarket: which is why soaring shares did little to boost consumption and crashing prices will do little to hurt it." [1]
The fundamentals of the Chinese economy remain strong and the the Communist Party's panic-stricken attitude isn't helping matters much.
Possibly… I don't really understand how that stock market-economy relationship works.
It's also entirely possible that the CPC could survive a full blown high street recession. I don't really know. But this is a game of he thinks she thinks that I think. The CPC seems to be reacting (so far, not that severely) in ways that suggest they are worried. I suspect they are worried about political consequences, not just economic ones.
Nothing has happened yet. I'm just speculating. But, I'll prick my ears if scapegoats start emerging, arrests happen, someone is accused of intentionally sabotaging the chinese economy…
The governments actions seem a little worryingly like they don't know what they are doing. They shouldn't be trying to prop the market up but should worry about maintaining spending in the real economy so people don't lose their jobs and the like.
Agreed, and actually part of that storyline is the fact that there is a massive outflow of capital from China, estimated $1 Trillion cash flowing out of China last year (http://bit.ly/1CP8Oj3), no doubt to due the people's inability to trust the government. China reported having foreign exchange reserve of $3.6 Trillion, which means that it will run down the reserve to 50% in two years, and even faster if panic helps accelerate the outflow. This places serious doubts on the chinese government to contain any massive deflation to either its stock market, real estate, local government debt, or black market lending using its reserve.
It's still a serious problem, but it seems like the $1 trillion outflow number is the authors' projection for the next year, based on their estimate of accelerating Q2 outflows.
Regarding the past year, the article simply says that "the cumulative capital outflow over the past five quarters [is] $520bn."
The CPC just want a soft landing, not necessarily maintaining high growth. Rapid deceleration of this nature is not a soft landing and is extremely disruptive. The whole system can come apart at the seams from wild swings as the Chinese economy is built on layer upon layer of structured fascism, unlike the mostly free market system of western economies which have evolved to mostly absorb these sorts of blows.
Or it's because the CCP was cheerleading stocks during the boom, and there was a VAST increase in the number of trading accounts being opened in the run up to the peak. Pensioners put their life savings into the stock market because the government was cheering for it (and it's not always a bad bet to go with what the government is backing). It dropped, what, 30%?
The rules changed so that housing can be used as collateral for margin lending, so a lot of them could have lost a lot.
P/E was about 100. In some cases, earnings might be fabricated. Get a loan (requires good connections), fake revenue, IPO, use the high stock valuation as collateral for the loan (I think this is allowed in China). Get more loans. Fake more revenue. Embezzle a bit. Usually they mean well, and aren't just outright cons, but there was apparently one big one the Hong Kong Exchange (which is usually more rigorous).
Housing can be 10X income. In some places 20X income. It's partly due to the government forcing down interest rates (tightly regulated banks - so savers may have negative real interest). Banks put a loan as doubtful if the debtor has stopped trading for 6 months, so there could be a lot of debt that's not so solid. And no-one knows what GDP is, but it might not be growing as fast as the government says.
An Asian country, with a median age over 35, crony capitalism, high savings rates, possible asset bubbles, a possible stock bubble, a government that's likely to go for bailouts rather than restructuring, and everyone thought it was going to own the US in a few short years if it doesn't already ... sound familiar? Japan, 1990?
Let me explain - China will bail out banks, state-owned enterprises (typically way less efficient than the private sector in China), and local governments. That ties up capital investment - the main people able to invest will be inefficient / corrupt cronies. Not so great for future growth. They might purge a few officials / bankers, but their replacements will not be much better (and maybe just from the right faction / family).
Just to big up a blog (quite bearish, but the guy's solid - it's not Zero Hedge) - http://www.baldingsworld.com/ is pretty good. He's typically said that the stock crash isn't that relevant - there's deeper economic problems, and while a stock crash might be a catalyst it's not the major worry (since the entire market cap isn't that big). It is a political worry though - the government lost a lot of face when they cheer-led stocks, then bailed them out, and they're still not doing as well as many people hoped.
I joke that at least the government is focusing on stability and fundamentals though - they started rounding up human rights lawyers.
I think you have not looked at all the signs. Why are all the Chinese exiting the market and trying to get out of the country? This runs deeper then just their stock market.
Today's crash was their biggest one-day drop since February 2007 and the second biggest crash in history.
This despite threats of arrests to "malicious sellers", "an $800B worth of public and private money enlisted to prop up its wobbly stock markets" (10% of its GDP), and government intervention on at least 40 different occasions in the past month:
Yes, but if you invested a year ago in the Shanghai Stock Exchange Composite Index, you'd still have almost doubled your money. 3 months ago, and you'd still be even after today's drop. It's a bad single day drop, but the actual levels are not so bad.
This misconception keeps being repeated. "Doubled your money". Please tell me: How would you sell? Do you consider stock ownership certificates in illiquid assets against the law to unload as "money"? Sure it has value, but you need to apply a discount ....
If you had invested all of your money then, yes. If - as seems to be the case in many cases for this particular bubble - you'd been so cheered by your gains that you took out a loan to continue playing, you'd be fucked.
That is one of the main issues with such a bubble, the hype when it is going up attract a lot of suckers who are quick to be separated from their money.
The VC market for tech companies basically died after the NASDAQ crash in 2000 for a good 3 to 6 years (I do not know precise times as it was a little before my time.) I think that is because a lot of VC's lost liquidity and couldn't make further on investments in their existing porfolio, there was very little M&A action, and there was no real IPO market. Thus these bubbles, even if they do not wipe everyone out can have serious long term effects for segments of the economy.
This is likely more serious than the NASDAQ because it is the general market rather than a tech specialty market -- but take all this with a grain of salt as I knowing nothing really about specifically China's situation, just making analogies with what happened in North America.
The only downside is that it took 15 years for the NASDAQ to recover to that frothy level. I do not know enough about China's markets to make any predictions though.
Note that CSI300 was around 2200 a year ago, peaked around 5400, and has been dropping continuously a couple percent a day down to 3800. Course you read this comment tomorrow, it'll probably close around 3600... repeat until it drops somewhat below normal. The slump will likely last another couple months.
The problem is that the valuation in the market is insanity, China's growth is slowing, and there are margin accounts that aren't on the books because they are done through backdoor lending channels. Couple all of that with the government's idiotic actions that have forced lockins for big institutional buyers and you have a disaster on your hands. Why would a large institution buy the market if you have told them they have to hold it for 6 months? Idiocy.
Not to mention there are stocks listed on the exchange that literally do nothing. Very much like the Dot Com bubble. I heard a story about a public company trading in China's A shares that is developing an "invisibility cloak."
I suspect the market will rally back hard, maybe even tomorrow, but over the next 6 months? I wouldn't want to touch it.
The Chinese economy is huge, and as a nation it is undervalued, but there is no way for these stocks to actually provide coverage to that portion of the Chinese economy.
Too much of that money is off the books, too many of its employees are unreported. Most estimates put it between 10 and 30% of GDP. I think even that is too low, count me with Shaun Rein of China Market Research Group --
"The official economic growth numbers are not too high at all. They’re too low.
Why? Because China’s underground economy is far bigger than the 10% to 20% of the total economy that most economists estimate when they do their calculations. Politically the government can’t admit that. A decade ago the U.S. Treasury estimated that 50% of Russia’s economy stayed underground, evading onerous taxes. China’s underground economy as a portion of the overall economy is at least as large as Russia’s."
Even if China's GDP is understated, its growth is slowing; many economist agree it is slowing more than the Chinese government is letting us see...The Chinese central banking authority is essentially doing quantitative easing, or is on the precipice of it...that is not signs of a healthy economy my friend. China currently greatly resembles Japan in the early 90s imo.
Besides, in the end, even assuming you are completely correct, their stock market it completely decoupled from their economic situation. Even if their economy was growing 10%+, the valuation (F P/E & P/E) is extremely exaggerated.
Does he ever qualify this analysis with any hard numbers? I remember reading a study once where researchers looked at electricity usage in Argentina to see what the theoretical output of the country should be vs. the actual output, and used this to approximate the size of the black market.
However, as Rein points out, Credit Suisse and almost all other studies of the Chinese Underground Economy, are only capturing data about Urban hidden capital. It is a commonly understood fact in China, if not quantifiable, that most rural families keep their money in cash, and are very quiet about the quantity of said money.
> The Chinese economy is huge, and as a nation it is undervalued, but there is no way for these stocks to actually provide coverage to that portion of the Chinese economy.
If the growth is outside official channels and unable to be reported on a scale of 50%, "bringing it into the light" would likely cause a major recession/depression all in of itself.
It functions because its unregulated, untaxed and its margins are improved by hiding. Once you add those additional expenses, alot of that business will crash.
That is, if the Chinese government was short-sighted enough to tax it at their current rates.
I can't imagine that they don't see the benefit to the laissez-faire economy. They just can't admit that there's a benefit, it goes against the party line. If they didn't see the benefit I'd have to believe they'd be doing more to capture those assets.
I must confess that when I saw a citation to the Heritage Foundation, I felt obliged to verify this through other sources; it seems about right. Also, it's an interesting exercise to view https://en.wikipedia.org/wiki/List_of_countries_by_tax_reven... which has a table is sortable by rate. You can see, for example, which states get revenue from oil, and have very low taxes but perhaps little incentive to diversify, and other interesting stuff. Looking at the extremes really makes me wonder how some societies operate.
That does not measure how effective that spending is, or how burdensome for the individual.
The US has higher taxes as a percentage of GDP, but we also have significantly more effective spending of said tax revenue. That lowers the 'effective burden' of that tax rate. Also, the comparative poverty of the Chinese populace makes that tax-rate significantly more painful to the people paying it.
While China has lower taxes as percent of GDP, the 'effective burden' is higher as the government provides little value to the general populace, and takes a considerable amount of their purchasing power away.
> While China has lower taxes as percent of GDP, the 'effective burden' is higher as the government provides little value to the general populace, and takes a considerable amount of their purchasing power away.
Given we have pretty thoroughly defunded things like the VA, IRS, highways, etc. I'm really not sure why you are convinced China is extremely terrible.
The US spends about half ($1 Trillion) of our federal taxes directly on Healthcare programs, between Medicaid and Medicare. We can afford to do that because of broad private-industry spending in R&D, Universities, Telecom, and other forms of central infrastructure. The value that those programs provide to our population are measurable and direct.
China, on the other hand, still having widespread government ownership of the economy, spends a significant portion of it's taxes on managing (mismanaging) their infrastructure and intellectual resources. That unfortunately only leaves about 6% of their $2.2 Trillion budget for healthcare, all the while, not having a private healthcare industry to fill the gaps. If you've been paying attention to China at all in the last few years, you would be well aware of their many literal bridges to nowhere, empty cities, and "san gong" spending.
Zhu Lijia, a professor of clear governance at the Chinese Academy of Governance 国家行政学院, puts "san gong" spending (or spending on luxury yachts, private planes, lavish dinners, etc.) at 1 trillion yuan, or 30% of total government expenditure.
> Medicare, Medicaid, CHIP, and marketplace subsidies: Four health insurance programs -- Medicare, Medicaid, the Children's Health Insurance Program (CHIP), and Affordable Care Act marketplace subsidies -- together accounted for 24 percent of the budget in 2014, or $836 billion.
1) So how exactly did you conclude "half"?
2) Where exactly did you get $1 trillion from? Even with four programs which are often confused into just "Medicare and Medicaid" we don't hit that number.
3) How can you expect me to take you seriously at this point?
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> We can afford to do that because of broad private-industry spending in R&D, Universities, Telecom, and other forms of central infrastructure. The value that those programs provide to our population are measurable and direct.
> China’s investment in research and development (R&D) is second only to the United States.
Here, we analyse the data to give a snapshot of how and where the money is spent. By Xiaole Ni.
> Wednesday, the Chinese central government announced both the allocation of 1.13 trillion yuan ($185.8 billion) for upgrading internet infrastructure and the creation of a 124.3 billion yuan fund for affordable housing. These expenditures follow Monday’s authorization of six new rail lines costing 250 billion yuan.
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> China, on the other hand, still having widespread government ownership of the economy, spends a significant portion of it's taxes on managing (mismanaging) their infrastructure and intellectual resources. That unfortunately only leaves about 6% of their $2.2 Trillion budget for healthcare, all the while, not having a private healthcare industry to fill the gaps. If you've been paying attention to China at all in the last few years, you would be well aware of their many literal bridges to nowhere, empty cities, and "san gong" spending.
Look, the gap isn't "mismanagement" its simply the fact they are per-person poorer than other nations and the US simply has to spend ridiculous amounts to get "average" results. You can't, mathematically, spend 17% of your GDP on healthcare without US level incomes and still pay for everything else.
> Aug. 30 (Bloomberg) -- Health-care spending in China will almost triple to $1 trillion annually by 2020 driven by an aging population and government efforts to broaden insurance coverage, according to a McKinsey & Co. report.
> China will spend more on drugs, medical devices and hospital treatments as it lifts spending to 7 percent of gross domestic product, from 5.5 percent, or $350 billion, in 2010, McKinsey said yesterday. This will make it the biggest market globally by 2020 after the U.S., which in 2009 spent $2.5 trillion, or 17.6 percent of its GDP, on health care, said the consulting company.
Seems to me, they are catching up as fast as a low-per-capita income country cound for healthcare spending. The sheer waste in the US healthcare system is truly phenomenal compared to its quality. I have an uncle who is a doctor who is literally planning to retire to another country because he believes he can get better quality care for a third of the price as well as a lower cost of living.
Quoting the US's outrageous spending as a percentage of GDP as "good" is nuts.
The UK spends ~9.1% which is all China needs to reach as it becomes possible for them to get a quality, first world healthcare system. They don't need to spend 17.1% of GDP like the US does. Its obscene how badly mismanaged the US's system is.
> The United Kingdom, which spends just $3,405 per person on health care, placed first overall in the comparison of 11 nations that include Australia, New Zealand, Switzerland, Canada, France, Germany and others. (Previous surveys examined smaller numbers of nations.) In 2004, the U.K. ranked third of the five nations studied.
It's clear that you've completely missed my substantive position, in fact, in a number of places you're supporting it.
My "about half" number was intended to include Social Security, I misspoke. The point isn't about healthcare spending. It's about programs of "measurable and direct" outcome to the benefit of the population. (This distinction is common, as is evidenced by the Forbes Tax Misery Index -- http://www.forbes.com/global/2009/0413/034-tax-misery-reform...).
Your R&D link doesn't at all respond to my point about R&D as a fraction of taxes, as it doesn't separate government-owned industry from truly private industry. Keep in mind that 74% of major companies in China are state-owned.
Your quote -- "Wednesday, the Chinese central government announced both the allocation of 1.13 trillion yuan ($185.8 billion) for upgrading internet infrastructure and the creation of a 124.3 billion yuan fund for affordable housing. These expenditures follow Monday’s authorization of six new rail lines costing 250 billion yuan." -- directly supports my position that the government of China is forced to allocate tax capital to infrastructure expenses because they do not have adequate private infrastructural management.
If China is planning to increase their Healthcare expenditure 10-fold, that will come at the expense of higher taxes, as again, they are not prepared for the private management of infrastructure.
While the point about US healthcare "mismanagement" is largely irrelevant in a break-down of tax expenditure, it's worth responding to, as that is a commonly held misunderstanding about the American healthcare industry:
That belief is largely derived from the fact that healthcare R&D, and the costs associated with it, are not factored into the international cost equation. Yes, American Healthcare is expensive, but it's also driving global healthcare outcomes forward. Those countries with low costs are benefiting directly from our healthcare expenditures, without paying their fair share, because they don't respect our patents, and push their costs off onto American tax payers by threatening to just steal our medicine if we don't give it to them at a price they agree with.
To put a fine point on that, the US had 32,139 Biotechnological patents, and 43,317 Pharmaceutical patents from the period of 2001-2009. The UK produced 3,062 & 5,693 in that same period, that makes them fourth in the world, and they still produce roughly a tenth what we're producing in terms of medical R&D. Yes, their healthcare system can operate very cheaply, but it does so at the cost of innovation, and on the backs of the American medical system. Given that we are producing the vast majority of the world medical research, the impetus for increased costs in our healthcare system should be obvious -- we're producing most of the medicine. If we nationalize our medical system, yes, we could get prices down too, but we'd also be destroying the world's medicine R&D system in one fell swoop. (http://www.wipo.int/export/sites/www/ipstats/images/wipo_pub...)
> It's clear that you've completely missed my substantive position, in fact, in a number of places you're supporting it.
Not really. You take "big numbers" as some magical comparison point between countries.
> To put a fine point on that, the US had 32,139 Biotechnological patents, and 43,317 Pharmaceutical patents from the period of 2001-2009. The UK produced 3,062 & 5,693 in that same period, that makes them fourth in the world, and they still produce roughly a tenth what we're producing in terms of medical R&D
...you are seriously quoting patent numbers of massively disparate populations?
Lets try to get this apples to apples:
75,456=32139+43317 vs. 8,755=3062+5693
319 million vs. 64 million. Or roughly 20% the population.
18,124,731 vs. 2,853,357. Or roughly 15% the economy.
75,456.15=11,318.4
1) If you scale that based on the size of the economy...yeah. The UK very much is "innovating" at the same pace as the US, its simply the US produces more patents because of its broken patent system and the difference in the size of the economy/population. Comparing a static value across such different economies is silly but since you insist...
2) ~9% GDP they get about 77% the R&D results. The US spends 17%. Double for ~23% increase in patents, a large portion of which are evergreen and overbroad patents that the US patent office rubber stamps.
> If we nationalize our medical system, yes, we could get prices down too, but we'd also be destroying the world's medicine R&D system in one fell swoop.
Not really. The Government in the US is the largest funding source for medical research and funds almost half of it.
Like many others, you delude yourself into believing "Government R&D bad!" when in reality its where about half of the advances the US generates comes from.
The Internet, medical research, basic science in literally every field, etc. All government.
Second of all, the wonderful US system heavily encourages patents in ways other countries do not which is why we are attempting to force it on them via TPP and others:*
> In the pharmaceutical trade, when brand-name companies patent “new inventions” that are really just slight modifications of old drugs, it’s called “evergreening.” And it’s a practice that, according to some who have looked into it, isn’t doing a whole lot to improve people’s health.
> “Typically, when you evergreen something, you are not looking at any significant therapeutic advantage. You are looking at a company’s economic advantage,” says Dr. Joel Lexchin, a professor in the School of Health Policy and Management at York University in Toronto, Ontario.
> The TPP’s impact on access to essential medicines is alarming and extensive. Leaked texts reveal language that would “evergreen” and extend patents without just cause, enhance the monopoly rights of drug companies, and establish precedent-setting limits on generic medications that impact not just TPP countries, but the region as a whole. These restrictions on life-saving affordable medications in the developing world also threaten access to medications here in the U.S.
Those numbers are heavily misleading due to that. The US is actively fighting to extend that and force it on other countries with their trade treaties.
> “The response from the brand side is that they are trying to protect their markets so they can further invest in R&D [research and development]. And even if they make a modification to a drug, doctors are still quite able to prescribe the generic version of the older product. Having said that, the brand-name companies put an awful lot of money into marketing the newer version, and that marketing is designed to affect what doctors do.”
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> If China is planning to increase their Healthcare expenditure 10-fold, that will come at the expense of higher taxes, as again, they are not prepared for the private management of infrastructure.
...they need to raise it about 3.6% and are currently spending 5.5%. That isn't "10-fold".
> My "about half" number was intended to include Social Security, I misspoke. The point isn't about healthcare spending. It's about programs of "measurable and direct" outcome to the benefit of the population. (This distinction is common, as is evidenced by the Forbes Tax Misery Index -- http://www.forbes.com/global/2009/0413/034-tax-misery-reform...).
...that is a completely different point than the one you were making. You can't just change the goal posts like that and throw about outright lies and expect me to take you seriously, so I'm done.
This. Was. Not. Supposed. To. Happen. (Quoting ZeroHedge.)
Worth noting: in the past few weeks, Chinese government tried very hard to stop the fall and prevent a crash - preventing selling by large stock holders, criminalizing short-selling, ordering stock buybacks, outright buying stocks, relaxing margin requirements, stopping IPOs, ...
Obviously, that's not a viable long term solution.
Is that interventionist policy any different to the Fed and ECB propping up of the US and European stock markets since the depths of the crash with QE? If not then when is the long term viability of that solution going to be called into play?
The Fed and ECB's goal is not to prop up stock market valuations, but to help the economy by encouraging spending and investment through moderate inflation. The banks are tightly bound by inflation targets. Arguably, the ECB has done too little QE since nominal GDP has barely (or hasn't) recovered in most of Europe since 2007, and inflation has been way under target since the crisis.
It seems like China's reaction is more panic-driven, and doesn't have a framework such as inflation targeting to constrain it. In addition, this intervention is just to prop up stock asset prices; encouraging spending and growth in the whole economy is not the primary goal.
With respect to "China's reaction is more panic-driven", check out the following three charts of US Fed policy which I would argue were "panic-driven" based upon magnitude of the intervention when compared historically.
It remains to be seen to what affect recent US Fed policy will do long term, however, I would argue that it was definitely a panic driven reaction.
I provide this not in support of China's policy but for context.
I think the better statement would be that it was a panic, but one with very different and more practical goals.
The US government was primarily trying to keep some big companies and banks that were caught in a liquidity crunch from going bankrupt, because them all going under would likely be a spiraling problem. The crisis solution was also rather simple in aggregate...loan them a bunch of money temporarily until they could free up the assets to repay it.
China is currently trying to prop up a stock market that is STILL (even with today's decline), up 50% in a year for no reason. And most trading in the market is done by very jittery small investors (who are also overleveraged and now desperate to get out) rather than big firms and funds. Said small investors are unlikely to be reassured by anything the Chinese government can possibly do. I don't see great chances for the government to be able to stop this from returning to a more realistic valuation.
Not to mention that I can't imagine how illegalizing trading and other knee-jerk reactions could possibly instill confidence in the market. Even if they can slow the decline, it seems like they'd just enlongate the decline until it reached a similar reality (if their actions don't actually increase the sell-off out of fear).
A lot of economists and market participants believe that these measure not only fail to mitigate falling asset prices but make them worse. For instance, short selling often makes matters worse:
>In 2008, U.S. regulators banned the short-selling of financial stocks, fearing that the practice was helping to drive the steep drop in stock prices during the crisis. However, a new look at the effects of such restrictions challenges the notion that short sales exacerbate market downturns in this way. The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly over the two weeks in which the ban was in effect and stabilized once it was lifted. Similarly, following the downgrade of the U.S. sovereign credit rating in 2011—another notable period of market stress—stocks subject to short-selling restrictions performed worse than stocks free of such restraints. [0]
Short selling allows market participants to put downward pressure on a security earlier helping the security reach equilibrium faster. Also, allowing the short sale of a stock incentivizes research that bring new less favorable information to public view. For instance, ability to profit off the decline of a stock may result in market participants in uncovering and reporting fraud or helping to pop bubbles.
Often times government interventions and restrictions in the market fuel panic.
For genuine science you'd have to have a control group. "The same group two weeks later" is not a control group.
>Short selling allows market participants to put downward pressure on a security earlier helping the security reach equilibrium faster.
This is story-telling. What happens has more to do with barely sentient flocking behaviour than "reaching equilibrium." There is no "equilibrium" to reach. There are only more or less naive and information-poor actors looking at each other and trying to out-guess the movement of the flock centroid.
It's like running an economy on the basis of a ritualised spot-the-ball competition.
If markets had any real interest in equilibrium or efficiency, bubbles wouldn't happen. But markets don't - mostly they have an interest in short-term gain, which makes the whole system as predictably unstable as any other system driven by positive feedback.
Of course some agents profit very nicely from bubbles, and politically bull markets are a useful way to create an illusion of shared prosperity. So it's in their interests for the manic-depressive nonsense to continue.
I agree with your story-telling perspective. No one knows "why" the market is down. There may not even be a reason or may be unknowable. All the reason that you should let prices adjust accordingly with minimal intervention because most interventions will have unintended consequences.
Maybe the second part of my sentence about short-selling was a bit of a reach, but short selling does provide downward pressure on prices which would (in theory) more accurately reflect the actual value based on what other market participants are willing to pay for it.
Prices are not arbitrary and are the best way to convey information. Trying to control markets by controlling prices is like trying to control the weather by controlling thermometers.
My personal theory is that disallowing short selling makes finding a bottom that much longer and tumultuous. Why? Because shorts need to buy to close out their positions. If you ban shorting, you have taken a large pool of buyers out of the market. You know that the only buys are those people dipping toes into the water. If you have shorting, you don't know if those are people dipping toes, closing out shorts, or someone getting ready to take a large position. It puts the healthy uncertainty back into the market, but this time in the mentality of making short sellers fearful. Fearful of a squeeze. That's what I've seen over my market experience (20 years trading, 15 years trading my own portfolio).
Buyers of a stock know that a restriction on short selling is most likely temporary. So if they buy now, as soon as the restriction is lifted, they can guess that the stock price will go down. So why not wait until things have returned to normal?
Maybe that was the goal of banning short selling - to get the market to take a longer time to go down, so people wouldn't panic and the transition would be smoother.
The biggest issue that regulators all over the world get confused about is, they think somebody has to sell for the market to go down, so if you ban selling, market will not go down as much.
But in fact, if you ban selling, market becomes less liquid, and so, buyers have to demand compensation for incurring additional liquidity risk. therefore, they will lower their bids and market will drop even more !
From what I can see, share prices often overshoot "fair" levels and become too cheap in a crash. Not that I'm complaining, necessarily; it can create an excellent buying opportunity.
Buying opportunity where you have some faith in the company, and it's financials? Too many NQ mobile's in that country. And the amount of fraud is appalling? Whatever system of government you have--cut down on graft, and fraud. Then, and only then will I gamble in your country.(NQ mobile can be bought here? What does that say about our stock market?).
Janet--raise the interest rate! The poor, and middle class are hurting! Enough is enough! Get CD's back to 5 %? The big boys are just playing at this point. Banks are not giving back?
Assigning a catch phrase to a certain activity doesn't make it any more or less of a good idea, but if you're buying "because it went down" you are probably just gambling.
Technically, if you are buying for short term gain without insider information, you are probably gambling (unless you see something others have missed, but does that count as outside information?). Otherwise, you want market growth over the long term, or are just hedging.
Well there are logical reasons not just animal spirits, under "normal" conditions some amount of demand lifts market prices a measurable amount because:
1) Workers buy into "it always goes up over a long period" so retirement money gets tossed into the market. However they're likely (temporarily?) unemployed or underemployed.
2) There normally exists a small but lively trading on margins market, day trading market, etc. However the margin / daytraders have been wiped out in the crash and it'll take awhile to grow a new crop of suckers.
3) Stable prices mean stable financial market means stable income for capex means stable growth. Collapsing prices make it hard to raise funds for capex. So you can't make more profit next quarter off a refinery expansion today if you can't raise the dough to do a refinery expansion today due to collapsing prices.
When things stabilize you'll pop back up to normal growth and prices. That might take weeks to decades based on past bubble experiences. DJIA only took from 1929 to sometime in the 50s to break even, inflation adjusted, so it could be 20+ years. Or maybe just a couple months. This being an epic 1929 scale bubble it could very well be 20 years.
I do acknowledge the stereotypical retail investor thing of always selling at bottoms and buying at tops due to animal spirits or whatever, but there are rationalizations beyond the future must be the same as the very short term past.
Once again, the problem is determining a 'fair, economically justifiable valuation' that a majority can agree on... generally a definition of this is the current stock price.
Not at all. If the stock price is primarily driven by speculators buying the stock simply because it's price is going up and they intend to profit thereby, then the stock's value has become independent of the economics of the business. This is why I specificaly mentioned economic justifiability. Speculators of that kind have no interest in the actual business or it's economics or even it's justifiability, only the short term stock price.
I love it when people call this a correction, as if unsophisticated Chinese investors are unlike the rest of humanity and will behave perfectly rational when they see all the value the gained disappear in a couple of months.
Here's what will actually happen in the coming months, China will keep on intervening in the stock market causing it to stop falling (because selling will be impossible). Investors will see their money become valueless because it's held up in worthless Chinese stocks killing whatever trust they had in the Chinese government. Then China will reach a period of 10 to 30 years where its market will not grow (because of lack of trust in the Chinese government).
If Chinese investors can get hyped enough to drive up valuations to 3000 p/e then they can also have a market panic.
Excellent reporting on the total Chinese loss of control by the SCMP's George Chen:
BREAKING: Shareholders of 9 listed firms incl. Southwest Sec (600369) under CSRC investigation for illegally selling stocks -company filings
— George Chen (@george_chen) July 27, 2015
China Securities Regulatory Commission urges everyone to report illegal trade and you can report malicious sellers at http://t.co/xNGiLniBLq
— George Chen (@george_chen) July 27, 2015
China Securities Regulatory Commission says to continue to monitor market activities and will forward case to police for arrest if necessary
— George Chen (@george_chen) July 27, 2015
CSRC spokesman: Can't rule out possibilities some investors are still "selling stocks maliciously"; regulator will continue to investigate
— George Chen (@george_chen) July 27, 2015
CSRC spokesman: we welcome all parties in society to provide clues about, report those who conduct malicious selloff. Hotline +8610 88060082
— George Chen (@george_chen) July 27, 2015
CSRC spokesman: China's state agency for margin finance has not "quit market" and will continue to increase stock holdings "at proper time"
— George Chen (@george_chen) July 27, 2015
Remember Mao's Cultural Revolution? Now there is Cultural Revolution in Chinese stock market: welcome everyone to report each other! Insane!
— George Chen (@george_chen) July 27, 2015
My view: China stock market crisis now proved to be more than market crisis but crisis in governance - show how incompetent, insecure gov is
— George Chen (@george_chen) July 27, 2015
China lacks innovation and innovation culture, for now. If they don't get that solved, they will not grow as much as they did during the last 40 years. They need to find ways to climb up the value added chain, innovation and know how would be the best way, but let's see how they play this out. They have a huge market though, so there is that.
I think the problem may be deeper. China certainly is innovative and technically adept, but they have a serious sex problem (one-child policy and demographics pun partially intended).
China isn't cool. Even the Chinese elite drive Western cars, watch Western entertainment, wear Western brands, and so on. Given that China's labor costs are nearly equal to American labor, if additive manufacturing strips away their manufacturing ecosystem advantage, there will be little reason to buy from China what can be cheaply made at home or elsewhere. China can make anything that anyone else in the world makes, but "Made in China" is the last thing people expect to see on a luxury product, unless it's accompanied by "Designed in California."
What do you mean by "even the elite drives western cars..." Obviously only the elite can buy these. And most Chinese people eat Chinese food, visit Chinese touristic places, read Chinese books, etc. There's only the western movies which could be said to really have no local equivalent.
It's not that China lacks brands, but that it lacks globally aspirational brands. Here's the problem in reverse: do non-Chinese aspire to buy Chinese-designed goods? It has even become increasingly unfashionable in China to wear knock-offs, making the demand for foreign luxury goods even greater. Of course only the elite can afford these items, but when the poor and middle class of today become the elites of tomorrow, what will be any different for them?
Democracy and corruption are very complex issues in China. Chinese in general aren't all that concerned about democracy, and the West has plenty of corruption, just in a different way. For example, American congressmen are hesitant to close expensive and unnecessary domestic bases because they mean jobs and votes for their home districts. Perhaps China could adopt an anti-corruption method pioneered by China's only female leader to have ever held the masculine title of emperor: Wu Zetian. She instituted a system of anonymous complaint boxes for local officials that went straight to Beijing. Although undemocratic, it helped stamp out corruption and improved the public's perception of fairness.
I think you are wrong on all points, being efficiently oppressed doesn't mean you aren't concerned about it and wouldn't want something better if it was available and you knew about it.
Your example of the American congressman might not be the most efficient use of resources but it is democratic, they are responding to their constituents needs.
The point about complaint boxes is laughable, it's like the companies I worked for with suggestion boxes that ignore every suggestion that doesn't match their world view. If every Catholic complained they couldn't practice their religion without government interference do you think it would make any difference?
Chinese in general are more concerned with the system working than it being democratic. They see Europe and America and view our democracy as dysfunction. Those complaint boxes did work, by the way. As a female emperor, not empress, Wu Zetian was under constant threat of coups and uprisings. That she managed to rule to a ripe old age is a prime example of her effectiveness. Then again, it wasn't all complaint boxes - she was rightly feared for her iron fist, like when she did away with one of her former courtesan rivals by having her appendages chopped off and the body thrown in a vat of wine so "she could finally have enough to drink."
This isn't that big of a deal. The Chinese stock market is tiny compared to its economy[0], something us westerners have a hard time understanding. The Chinese government is really just experimenting with all of their interventions, this really has no bearing on the health of the Chinese economy or world economy and is really only bad news for people that heavily invested in the last few months.
Even after these drops SHSZ300 and .SSEC are still valued almost 2X from what they were year ago. This is crazy within a year bubble that is bursting. There will be several 8% drops until markets have retreated just one year.
Chinese stocks were overvalued for a while now, at least I heard that many times before. It seems that no one can beat beat the willing of free market - even Chinese government.
How bad can this spread to the rest of the world ? I remember 2008 with the US it affected Europe bad, I'd imagine China causing the same effect if not worse..
I'll post some quotes from "The Australian Business Review"
"Commodities in a meltdown, but coal, uranium offer some hope "
"Copper has hit a six-year low"
"Nickel took another hit, ending at $US11,255/tonne while lead shed more value to close at $US1716/tonne."
"Aluminium continues to weaken. ANZ says demand in Europe has failed to pick up, underlying Chinese demand is weak"
Admittedly Australia is just the mining division of China so its hard not to expect them to crash. Still, Australia has been in an impressive housing bubble at least three times over trendline because China only grows and exports to China only grow, well, at least they only and always grow until they don't. That'll have some impact on financials in Australia and then the world.
Nickel, for example, used to be pretty stable, almost "boring" in the 90s and before. Then it tripled in the boom, and has collapsed since then but is still about twice over trendline. This is interesting to think about technologically, imagine the price of NiMH batteries has been 3x trendline for the last couple years and "should eventually" drop to about a third of present price. Of course its little consolation that hybrid cars will be cheaper if you're unemployed because the economy crashed, but "someday" hybrid battery packs will only cost a couple hundred bucks. We might all be standing in church soup lines for food, but at least hybrid batteries will be cheap.
The China market is pretty limited in reach; not many foreigners and not even many institutional investors; it is rife with insider trading and is pretty volatile. It is more like Macau than wall street. Still, dysfunctionalities in the Chinese economy that they were trying to hide with a stock market boom will now come in front and center, which will have some effect on the global economy. Especially in raw materials and energy, but even in some trade.
The China market is pretty limited in reach; not many foreigners and not even many institutional investors
How much money do Chinese investors have invested outside of China? If they bought Chinese shares on margin, they may end up selling assets globally to cover.
Q3 financials showed iPhone revenue up 60% from the same 9 month period last year, with 80% overall revenue growth in China, 17% in EU, 19% in US. Chinese market is contributing $46bn in revenue compared to $72bn in the US, $40bn in Europe, and $11bn in Japan.
A widespread slowdown in China's economy would have major impacts on the rest of the world, but it's important to remember that the stock market is not the economy (just an imperfect measuring device). The stock markets in China have been very bubbly lately.
My (admittedly limited) understanding is that most economists are still expecting significant growth in China this year, though not as strong as previous years.
Also, the recent financial crisis in the US was partially/mostly driven by a debt crisis (housing/mortgage issues), which historically has had far larger and longer-term impacts than a stock market crash/correction.
The US's whole financial system is tied into its stock market and the financial sector around it (because of leverage and derivatives and every company being public) -- I understand this may not be the case with China? Or am I wrong on this front.
I believe you're correct that the stock markets in China are less directly tied to the economy than than the stock markets in the US.
But, even in the US, I think stock markets are like a balloon tied to the wrist of a toddler on a windy day. They may very generally track where some part of the economy is, but there's too much interference and interpretation to get a precise picture. Even worse, the length of the string is unclear.
If it results in a contraction of the real Chinese economy then resource exporting countries (Brazil, South Africa and Australia spring to mind) would feel some serious pain. I'm not sure how much of an effect it would have on the US and Europe.
I guess the tens of millions of retail investors who entered the market in the past year or so will burn their fingers.
Lenders will probably take a hit since a lot of people were playing with borrowed money.
The credibility of the government will take a hit - many have already been moving money out of the country at a record rate because they don't trust the government, and retail investors who are now losing their savings will start questioning the government.
What I find more worrying is mining and oil companies doing big layoffs and postponing investments at this very moment ( partly due to overproduction on anticipation on Chinese demand ).
I wonder what this will mean for the world economy. Are we limping from one recession into the next?
> I wonder what this will mean for the world economy. Are we limping from one recession into the next?
Check out the USD / AUD exchange rate for a good example of the danger.. A company I worked for used to do a lot of business in Australia. We made the decision to go there when the currency was favorable from the US perspective (about $0.85 USD/AUD), tried to stick it out but got crushed since our money was raised in the US but the rate spiked to $1.1 USD/AUD and stayed above $1 for years. Today, the rate is more like $0.73 USD/AUD. 30+% swings in a few years are poison for international investment.
The Australian economy and currency have been hugely propped up by all of the Chinese demand for raw materials and commodities and is going to really start hurting if there's a prolonged pull-back in China.
Not really (at least for the US -- I don't know about the UK). The unemployment rate is only low because so many people have given up on looking for work. The labor participation rate is at its lowest level since 1977. Here is a nice chart:
Also, full employment usually implies rising wages as employers chase scarce talent. This has not been very visible in the US. Perhaps the ability for employers to invest in the global talent pool could be tempering this affect.
If the market were really tight as trumpeted by the media, there would have been wage pressures already. Perhaps the tight market is limited to SV - I certainly see no signs of hot labor market in Boston. Smaller software companies do have quite a few openings, but are very price-sensitive (and picky, too). Bigger companies are mostly shedding people (either through attrition or selective layoffs).
Based on my completely non-expert analysis, it looks like the index is likely to drop down to around 2,800-3,000 or lower...unless there is some realistic explanation for an index which was on a slight downward, long-term trend to suddenly jump up by 130% in ~9 months.
So, in one day, the stock market has lost everything that it had recovered during the last 3 weeks, after the government intervention to stop the fall that started in June. Looks like those interventions ran out of steam.
Chinese have a cultural bias to save money. This was a problem in the past because vast quantities of cash were stuck in the "mattress" sort of speak. They encouraged people to invest their money in stocks, and that led to the bubble that is crushing now.
There is also a culture of snobbery that drives up savings rates. The dearth of available women means that men have to stand out to be worthy of a bride, and many women will barely consider men who don't even own homes. When so much saving takes place just for the hope of starting a family someday, there should be little surprise that only scraps remain for consumption.
No, I'm a chinese person born in the US, I can confirm it's cultural. My father is from Asia and he sometimes looks down on "stupid/uneducated" Westerners for not saving their money. The irony is that if the the typical chinese person was "educated" they'd know that a functioning economy needs people to spend.
Agreed, as long as people don't spend money they don't have :-)
You could be saving too much (example: China with 30-50% income saved) or not saving enough (example: the US, with saving levels around 5%, was actually negative before the Great Recession)
Neither option is particularly good for the economy, but if I had to choose, I'd rather over-save than over-spend.
It's in Chinese governments interest to see that the mass population's wealth are not wiped out, especially when they have encouraged people to put money in the stock market, even on margins.
Already before the rally of the SSE, China was not in a healthy state with large amount of debt.
Now they are printing more money, taking on more debts to prop up the stock market and they've shown everyone that they are powerless.
In the meantime,I speculate that Chinese government will go all out to prevent the SSE from sliding any further. It's government continuity is indirectly threatened. And this is why I can't speculate on China anymore, it's exactly like a casino where you are playing against the house, and they won't let you leave with any large profits and accuse you of cheating.
To those downvoting me. Are you from another planet? On this one China is just about to incorporate Russia in about 10 years. Buy railway-connected stock, I am serious.
The politics of it, well that is interesting. The Chinese government is acting a little panicky. Suspending trading, banning "malicious" selling, state supported margin loans.
It makes me think that they may have taken on the pundits' belief that the chinese public will support the CPC regime only as long as rapid economic growth is part of the package, that any economic troubles will result in regime change.
IMO, that's the storyline to watch.