This article was published at The McAlvany Intelligence Advisor on Friday, July 31, 2015:
China has its own Plunge Protection Team. Its efforts were in evidence last Wednesday as the Shanghai and the Shenzhen indexes, both of which had been flat most of the day, leaped up three percent and four percent, respectively, in the last 30 minutes of the trading session.
Jacky Zhang, an analyst at BOC International, a wholly owned subsidiary of the Bank of China, exclaimed: “Clearly it is government invention again.”
The team, made up of top officials of the Bank of China, China’s Securities Finance Corporation (CSF), the China Securities Regulatory Commission (CSRC), and others from the country’s 21 largest brokerage houses, is trying to avoid a repeat of the 2006-2008 bubble and collapse.
In early 2006 the Shanghai index was trading at just over 1,000. Over the next 18 months it exploded to 6,000 and then, within six months, was trading back at 2,000.
In early 2014 that index was still trading at about 2,000 when, once again, aided by margin accounts being offered to new investors seeking other places to put their investable capital than real estate (which was showing signs of its own collapse), it started trading higher. It reached 5,000 last November, then began its terrifying decline, hitting 3,600 before the PPT started intervening.
Those interventions knew no bounds. It implemented an entire panoply of measures to stem the tide, including:
Demanding that foreign banks wishing to continue doing business in China refrain from making any negative public comments about its stock market;
Lending $42 billion to those brokerage houses for them to use to buy stocks;
Demanding that those brokerage houses ante up some $20 billion of their own capital to purchase equities;
Announcing new stimulus in the amount of $40 billion for infrastructure projects;
Speeding up similar infrastructure spending already in the works;
Allowing margin accounts already underwater to remain open despite sustaining margin calls;
Demanding that the owners of China’s 300 largest corporations refrain from selling any of their stock for the next six months;
Eliminating any new public offerings of stock;
Cutting interest rates to new lows; and
Allowing the yuan to continue to depreciate against world currencies in efforts to stimulate exports.
There have been efforts by observers on the scene to place the blame for the Chinese market’s volatility elsewhere: on individual stock investors. J.J. Zhang, writing for MarketWatch, provided his readers with this alternate view, that the volatility was based not on PPT market manipulation, but on “the individual behavioral habits and viewpoints of Chinese market participants.” Chinese retail investors make up 85 percent of the market, he says, and that, combined with the highest trading frequencies in the world and the lowest education levels, naturally makes the markets volatile.
Zhang says this results in the markets’ “irrational behaviors” and turning the markets into a casino and “not for [long-term] investing.” He says that with market gains, even after recent declines of more than 100 percent over the last 12 months (and 30 percent over the last six months), greed, jealousy, and ignorance are responsible for the markets’ behaviors. Those investors are also banking on the unspoken promise that if things get out of hand, the PPT will step in to keep losses from getting out of control. That reduction of “moral hazard” is also another tool taken from Wall Street’s PPT.
Zhang says it will just take time for those gamblers to learn to become long-term investors: “Maturity takes time. Just as kids grow from naïve adolescence to rowdy teenage years to eventual maturity, so will China and its market participants.”
It will take more than the passage of time, however. The “casino” atmosphere both in Shanghai and on Wall Street is caused by the disconnect between prices and value resulting from government interventions. In the US the PPT is populated by worthies from the Treasury, the Federal Reserve, the SEC and the Commodity Futures Trading Commission (CFTC), and it has officially been tasked with the responsibility of “maintaining investor confidence” in the markets.
But instead, according to one former member of the US PPT, Dr. Pippa Malmgren, a US financial advisor and policy expert based in London, as a result of those interventions to prevent markets from correcting themselves, “There’s no price discovery anymore by the market.” In other words, investors have little idea of whether prices reflect real value and so are guessing, not investing.
One of the most powerful tools to make the market look stronger than it really is was revealed by another insider, former Federal Reserve Board member Robert Heller who, writing in theWall Street Journal, said that “Instead of flooding the entire economy with liquidity and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.”
That bump upward is turning out to be just a minor hindrance to a market that is determined to find its way lower. The 200-day moving average of the Shanghai Index, considered by many to be major support, is just below 3,600. On Thursday that index closed at 3,705. If the 200-day is breached, the next major support is back at 2,000. At that level, those new inexperienced investors seeking refuge from a collapsing real estate market in China may learn once again that, in the face of governmental intervention, there is little safety anywhere.
Telegraph.uk.co: China losing control as stocks crash despite emergency measures
Marketwatch.com: Chinese stocks close higher, halting 3-day skid
Marketwatch.com: Opinion: Let China’s bubble burst
Money.cnn.com: China is taking 10 huge actions to save its stock market