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» Hatrack River Forum » Active Forums » Books, Films, Food and Culture » The Great Fall of China

   
Author Topic: The Great Fall of China
JanitorBlade
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Not to toot my own horn too much, but I wrote about way back in March.

Welp! Too many companies listing on the Chinese Shenzhen stock exchange coupled with shady accounting practices which lead to bogus valuations of companies lacking any real fundamentals, and viola, $3 Trillion dollars evaporates. And the end isn't in sight.

President Xi relies on economic prosperity to continue his massive program of power consolidation. Pretty big setback for him and his policies.

[ July 08, 2015, 01:16 PM: Message edited by: JanitorBlade ]

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Samprimary
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but who's going to tend those giant empty cities now
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Samprimary
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more seriously though: I hope this doesn't feed on itself a whole bunch and cause great amounts of misery to great amounts of people
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Elison R. Salazar
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In the long term it's probably a good way to clean house and secure the foundations for sustainable economic growth; if it is handled correctly.

On the other hand some analysts are thinking this isn't as big a deal as it could be:

quote:

The Shanghai Composite Index has fallen 27% since 12 June 2015, a sharp drop versus the 117% jump over the previous eight months. These dramatic swings have raised concerns about a possible negative impact on the economy. In this note we look at the main channels through which equity market volatility can affect the real economy. First, our estimates suggest that the stock market wealth effect has less impact on consumption than many think. Consumption growth in China is largely driven by income growth rather than changes in wealth and Chinese households still park most of their wealth in cash and deposits. Less than 15% of their financial assets are invested in stocks. Second, the recent IPO rush notwithstanding, total equity financing year to date amounted to RMB289bn, less than 5% of total social financing over the same period. Third, although margin financing on the equity market has risen rapidly, the trend has started to reverse over the past few weeks.

This is the point I’ve been making recently about the Shanghai bust not being disaster in and of itself. At a 15% share of household financial assets equity holdings are relatively minor. Add property and the share becomes small.

By comparison, Australian households hold roughly 7% of their total wealth in direct shares but that rises to 28% when we throw in super so it’s around 20-25% net.

The real problem is the Shanghai bust complicating the existing hard landing.

http://www.macrobusiness.com.au/2015/07/china-households-are-not-exposed-to-shares/
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JanitorBlade
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For serious. But man, thank goodness equity markets are not yet such a huge part (relatively speaking) of the Chinese economy.
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Mucus
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This is probably a good time to illustrate why predicting the future is difficult. I'm not sure which post you're referring to here, I think you linked to the Washington Post twice accidentally. So let's split the difference and say you take a time machine to March 15. You place a big bet that the stock market would decline by July 7.

There's a big bubble and with the benefit of hindsight, you know there's going to be a huge crash. Sure bet right?

Go back in the time machine and go to July 7. Wrong.

Load up Google Finance and check.
https://www.google.ca/finance?cid=7521596

For the period March 15 to present, the Shanghai index is still up 10.5%.

How about the combined Shenzhen/Shanghai stock exchange?
https://www.google.ca/finance?cid=1979150

Still up 9%.

Now of course, this will certainly change later. But by jumping the gun on the prediction, the prediction is basically useless.

That's setting aside the question of whether a stock market crashing is inherently a bad thing, which I don't necessarily agree with either.

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Elison R. Salazar
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It's bad in the case like the US 1929 crash or the 2008 crash in that the world economy took a huge hit because of a lack of suitably enforced regulations and leave tens of millions unemployed and desperate for any charismatic figure.
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Mucus
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On the other hand the 2008 financial crisis was an amazing opportunity for investors and young people building up their investment portfolios to buy really good companies on the cheap.

More importantly, if we imagine an alternate reality, where the 2008 crash didn't occur, and the issues with subprime mortgages were discovered not in 2008, but in 2012 after being given much more time to spread and cause damage ... I don't necessarily think that we'd be better off with a much bigger crash.

We should also be reminded that not all bubbles are caused by fraud, plain old speculation is sufficient and is probably a better explanation for a three month bubble and crash. Its not as if fraud almost doubled in the last three months.

There's this good bit of perspective in that otherwise sensationalized article
quote:
Critics who think the government has overreacted are particularly mystified by the fact that the market was not malfunctioning. Trades were closing, market participants were not failing and, if anything, a three-week, 30 per cent correction after a 12-month, 150 per cent surge seemed like a welcome adjustment.

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Orincoro
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quote:
Originally posted by Elison R. Salazar:
It's bad in the case like the US 1929 crash or the 2008 crash in that the world economy took a huge hit because of a lack of suitably enforced regulations and leave tens of millions unemployed and desperate for any charismatic figure.

Well, Elison, in both cases these were *credit* crises, in addition to stock market crashes. A stock market adjustment on its own is not such a terrible thing when the credit market is not too heavily invested in stocks.

In the case of 1929, the problem that fueled the collapse and chaos was that much of the supposed value in the stock market was itself generated by consumer speculation on the stock market, in the form of margin buying. People leveraged their credit to buy stocks, and when the stock value went down, they had to sell to cover their losses, causing a downward spiral and associated panic.

In 2008, it was a bit different. This time, people had leveraged credit too heavily to speculate on real-estate, while at the same time, banks had packaged mortages into their financial instruments to make them appear to be very safe investments. When the value of real-estate dipped, the value of the "safe" investments evaporated. When that happened, credit on the real-estate market disappeared, causing the prices to further drop.

In the case of China, so far, a big part of the "value" of the stock market is in the non-liquid valuation of companies that are not being traded heavily. This means that a minority of share-holders hold most of the stock, and most of the stock is still worth more than the actual cash investments that have been made. Since Chinese consumers don't have enough cash to invest directly in stocks, there is a valuation bubble, but not any associated financial contagion. If the value goes down, it isn't tied to much of anything sensitive- it isn't people's life savings in banks, or their houses, for the most part.

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JanitorBlade
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quote:
Originally posted by Mucus:
This is probably a good time to illustrate why predicting the future is difficult. I'm not sure which post you're referring to here, I think you linked to the Washington Post twice accidentally. So let's split the difference and say you take a time machine to March 15. You place a big bet that the stock market would decline by July 7.

There's a big bubble and with the benefit of hindsight, you know there's going to be a huge crash. Sure bet right?

Go back in the time machine and go to July 7. Wrong.

Load up Google Finance and check.
https://www.google.ca/finance?cid=7521596

For the period March 15 to present, the Shanghai index is still up 10.5%.

How about the combined Shenzhen/Shanghai stock exchange?
https://www.google.ca/finance?cid=1979150

Still up 9%.

Now of course, this will certainly change later. But by jumping the gun on the prediction, the prediction is basically useless.

That's setting aside the question of whether a stock market crashing is inherently a bad thing, which I don't necessarily agree with either.

Thanks for the heads up about the link. I've fixed it so that my actual writing shows up. [Smile]

As for it still being "up", well I think the simple explanation for that is that China has frozen equity trading and is pumping money to investors encouraging them to buy the stocks that are still trading.

Unfrozen I'm certain they story would be different, not that I'm suggesting the government should unfreeze trading.

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Mucus
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While its true that frozen equities may account for some of that, let's not stray from the larger point that predicting the future in a useful way is hard. Predicting for a crash is sexy, but all stock (or housing, etc.) markets have bubbles and crashes at one point or another. Hell, even trading halts are not uncommon. The NYSE just had one today.

To say that a bet based on your prediction would have earned money if the Chinese government had not frozen equities and done its form of QE is kind of pointless because they did do it.

There are plenty of investors that would have gained or lost money differently if the US had not done bailouts of automobile companies, TARP, and QE in 2008. But the US did do those things. That's the world we have to live in, and that's the world where predictions have to be useful.

To say that the world is wrong, but your prediction is right *shrug*

(This is not to say that the Chinese and Americans *should* do those things, I would actually have greatly preferred that they didn't in all the above cases.)

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JanitorBlade
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Mucus: I never said people should try to profit off the equity markets collapsing by betting. I said that a crash was coming, and it's not going to be a fun time for investors.
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Mucus
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Actually, I would argue that this is a great time for investors. It's a bad time for speculators.

As for the former, I'm just evaluating the predictive power of your prediction in the most straightforward manner. A prediction that a solar eclipse will happen in general in the future is much less impressive than a prediction that it will happen on X day of Y year and it actually happening.

Testable predictions are important.

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Elison R. Salazar
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quote:
Originally posted by Mucus:


(This is not to say that the Chinese and Americans *should* do those things, I would actually have greatly preferred that they didn't in all the above cases.)

:stare:

I mean... Beyond a doubt the US went about it in a way that's only delaying the inevitable until the next crash and didn't do nearly enough to punish those knowingly acting illegally. But I would hope you don't mean having the Federal gov't literally just let everything go down. I think the US economy would've literally have collapsed.

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Mucus
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Letting a few banks and individual auto companies go down != let everything go down

Here's an example:

quote:
Thanks to their access to below market credit in their time of need, courtesy of the taxpayer bailouts, the Wall Street executives are still pocketing tens of millions a year and the banks are again making record profits. Had the market been allowed to work its magic, this wealth and income would have been available for the rest of society. The financial sector will continue to be a drain on the rest of the economy because the government saved it from the consequences of its own recklessness.

Claim 2 implies that the economy would have collapsed absent the TARP. It assumes an absurd counter-factual: that the government and the Fed would have allowed the banks to collapse and then done nothing in response to boost the economy. Of course that would have been a catastrophe, but it is simply a lie to claim that our options were either doing TARP or never doing anything.

There is no reason that we could not have let the banks go down in the cesspool of junk loans that they had fostered and then flooded the system with liquidity after the fact to boost the economy. This is the serious alternative scenario -- not the permanent do nothing scenario that TARP proponents have created.

...

In short, the TARP opponents are absolutely right. TARP was an unnecessary giveaway to the Wall Street crew that was responsible for the financial crisis.

http://www.cepr.net/blogs/beat-the-press/the-cost-of-the-tarp-one-more-time
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King of Men
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Economies cannot literally collapse. They can only collapse figuratively or metaphorically. That's because they are not physical structures.
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Orincoro
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You're technically correct KoM. The best kind of correct.

And of course in this case, the collapse is figurative but also real in implication and impact. A market collapsing is the cessation of market activity, and the loss of value, with a corresponding loss in the market's ability to facilitate the exchange of goods and services.

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Orincoro
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quote:
Originally posted by Orincoro:
You're technically correct KoM. The best kind of correct.

And of course in this case, the collapse is figurative but also real in implication and impact. A market collapsing is the cessation of market activity, and the loss of value, with a corresponding loss in the market's ability to facilitate the exchange of goods and services.

quote:
Thanks to their access to below market credit in their time of need, courtesy of the taxpayer bailouts, the Wall Street executives are still pocketing tens of millions a year and the banks are again making record profits. Had the market been allowed to work its magic, this wealth and income would have been available for the rest of society. The financial sector will continue to be a drain on the rest of the economy because the government saved it from the consequences of its own recklessness.
This presupposes that there would have remained a means by which that wealth could be reliably built, goods exchanged, and services appropriately valued. The fear that got TARP pushed through was that without the banking system, as parasitic as it is, there might have been no other way of spreading liquidity in the economy. A real and valid fear in my opinion.

Sort of like yeah: the cops are corrupt, but you can't destaff the police department and still expect to be able to fund law-enforcement. Where do the funds go?

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Mucus
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I think he assumes that people knew that there are banks not on Wall Street as common knowledge.

For example:
1) American banks that didn't need bailouts
quote:
I've dug up, with the help of research available on TARP tracker Bailoutsleuth.com, at least 54 publicly traded banks that explicitly refused to take part in TARP. And it's worth pointing out that several of them are decent-sized.

Hudson City Bancorp (HCBK) and People's United Financial (PBCT) are both in the S&P 500. Commerce Bancshares (CBSH), BOK Financial (BOKF) and NY Community Bancorp (NYB) are among the 50 largest banks in the country as ranked by assets, according to figures from the Federal Reserve.

http://money.cnn.com/2009/09/11/markets/thebuzz/index.htm?postversion=2009091121

2) Banks head-quartered in other countries with significant operations in the US, such as, well, all the Canadian banks which did in fact expand significantly in the US by buying up insolvent banks during the crisis

The other possibility that he brings up is that the specific banks that would have died could just have been nationalised, killing off creditors and senior staff, but leaving operations in tact.

There were many ways of skinning that particular cat.

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Elison R. Salazar
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B-b-b-b-but Socialism!

The question I would have regarding those banks that didn't take part in TARP, is whether they would've still not had the need for TARP if those banks that did had in fact went down. The problem was that those banks collapsing was the fear of a systemic collapse, wherein one bank falls and takes down the one under it, and so on and so forth.

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JanitorBlade
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Looks like China has managed to rally the Shanghai markets for now, let's see if they can pull this off. If they can, it will certainly force many analysts (And yours truly) to evaluate what they think they know about modern equity markets. [Smile]
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GaalDornick
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quote:
As for the former, I'm just evaluating the predictive power of your prediction in the most straightforward manner. A prediction that a solar eclipse will happen in general in the future is much less impressive than a prediction that it will happen on X day of Y year and it actually happening
I mentioned to someone recently that I'm in the market to buy a house. He advised me to think twice about that because "another crash is coming." When I asked when (and why) he thinks tje crash will happen, he responded "it could be in a few years. It could be tomorrow. Who knows? But it's coming."

Ok. Well. Thanks.

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Elison R. Salazar
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quote:
Originally posted by JanitorBlade:
Looks like China has managed to rally the Shanghai markets for now, let's see if they can pull this off. If they can, it will certainly force many analysts (And yours truly) to evaluate what they think they know about modern equity markets. [Smile]

It's probably still a potemkin village so it's hard to know if the stock markets are based on anything solid and whether this will just happen again in a few years. Like the US insurance markets.
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Geraine
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Most of the people that invested in the Chinese stock market were middle class Chinese that were looking to make some money, as the stocks were going up quickly.

Now that it is crashing and these people are taking their money out, there are analysts saying that they may turn to other types of investments in other countries, more specifically in the US housing market.

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RivalOfTheRose
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Investing in the US housing market would be good for us stateside if we are looking to sell and buy?
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Elison R. Salazar
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Oh god, more places where the price of living can triple.
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NobleHunter
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If certain commentators are correct that Chinese/Asian investors are driving up housing prices in Vancouver (BC) and Toronto, then it's only good if you're looking to sell. Buyers will soon be confronted with the up slope of a bubble. Or a rapid rise in prices if you're an optimist.
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Elison R. Salazar
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Horrible if your an average person looking for living space.
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Geraine
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quote:
Originally posted by Elison R. Salazar:
Horrible if your an average person looking for living space.

But excellent if you are in no hurry and are willing to wait until the next housing bubble bursts, which will eventually happen.
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GaalDornick
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Not if the bubble bursting just brings it back to where it is now, presumably the start of the Chinese-purchasing bubble.
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JanitorBlade
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Will the mighty CCP force the Chinese stock market to obey its commands?

We'll see.

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Mucus
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For those keeping track, the Shanghai composite index is still 11.33% above where it was when JanitorBlade predicted doom and gloom on March 12th (By way of comparison, the NYSE composite is up 1.91%).

Of course, like the best predictions about the second coming of Jesus or judgement day, there were no actual dates or verifiable numbers in that March 12th prediction [Wink]

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