Shangindex3715There is no such thing as a gradual panic

Having plunged from 5400 to 3800, despite three brief rallies the Shanghai index fall is now worrying Beijing enough to bring in draconian measures. The actions haven’t been what you could call consistent: but the underlying causes of the correction are obvious.

Towards the end of Wednesday trading, draft proposals to to ease restrictions on margin lending were hastily brought forward. But only two months ago, the Chinese government restricted the practice….on the sensible grounds that it encourages dangerous levels of borrowing by traders. However, cash-strapped investors who bought on margin are forced to sell to pay back their loans. This leads to more selling, creating a vicious circle….and a panic.

Now it seems that, just before lunchtime Shanghai time today (Friday) more than twenty short-selling accounts were suspended by regulators.

Words like Fred, Karno and Circus spring to mind. Some argue that the initial move to tighten margin lending by the China Securities Regulatory Commission (CSRC) created the problem in the first place, but I don’t entirely buy that. The Shanghai index is one of several major stock market measures felt by some of us to be ridiculously overvalued. The 24% drop seen since June 12th is a correction that looks set to become a crash. But Beijing isn’t exactly inspiring confidence.

We’ve all been focused on the Greece/EU crisis for some time now; but the Shanghai losses since the market high – only 15 trading days – represent ten times the entire Greek gdp during 2014. And even after this correction, the index is still double what it was before the bubble began pumping up. Why?

I would argue as follows: cheap money encourages margin borrowing to get silly; it also causes asset bubbles, and bubbles always pop in the end; the market has been overheated by neolib IPOs that reflect the continuing Chinese retreat from State ownership; having shot too high, a correction was inevitable – but the CSRC has been looking both confused and slow in its reactions.

“Today, we sit in a situation where investors are very long the Chinese equity market, but the valuations have gone from being one of the cheapest markets in the world to one of the more expensive markets in the world,” Robert Parker of Credit Suisse told India’s Economic Times. Another opinion, however, was more blunt: “China is a big liquidity-bubble unfolding. One day, it will burst,” said Quant Capital boss Sandeep Tandon.

We need to see this issue in the same broad perspective as the Greek marathon: a Western globalised system of credit and Bourse-fuelled ‘growth’ ran out of steam seven years ago. No reforms have been undertaken, but cheap, loose money – QE and Zirp – are pumping up market valuations while depressing Silvers demand at one and the same time. Add to that a fall in wage values and employment security among the younger demographic groups – with its most extreme form being seen in ClubMed – and you have the entire menu laid out for the cannibal known as Friedman/Levitt globally financial capitalism.

The neoliberal fattie Mr Creosote is eating himself. He being obese, devious and politically powerful, the process will take quite some time. There may be unpleasantness, and there will be hardship. But the unravelling is inevitable.

Yesterday at The Slog: Why the European Union is in a much deeper hole than Greece


  1. The JSE or Johannesburg Stock Exchange is trundling along in the green fairly confidently. What do the local South African players know that we should all be told about?
    I’m truly baffled as the country has a wobbly and VERY EXPENSIVE electricity supply, MASSIVE unemployment and a government that makes the Marxist-tendency currently running Greece into the ditch look like positively rock steady conservatives.
    Oh, and the levels of corruption throughout society would make the Idi Amin/ Mugabe communal mind sets blush as to their inability to much such lofty benchmarks of terminal and reckless greed.


  2. Another example of markets confirming Minsky’s theories. Minsky Moments tend to come round every seven to eight years. Now when was Lehman?


  3. This is the film I wanted to post yesterday. It shows the last hundred years or so of history, how thanks to our addiction to oil and allowing the Saudis to do what they wanted (i.e., have their own Wahhabis fight abroad and not their own powerbases) have reaped a bitter harvest – in Afghanistan building dams raised the water table and up popped the opium poppy – heroin flooded the West. It is the 1973 oil shock which flooded the West with petrodollars which led to the loss of government control of our economies.

    And that my friends, is what The Matrix is. Your perceptions of reality are definitely being skewed. Do not adjust your set and run off in a midlife crisis. The situation is unravelling of its own accord.


  4. Geological reasons mean southern Africa is stuffed full of precious and rare metals, whereas Greece has virtually none. In the years to come, access to resources is likely to be of highest importance as the world as a whole reaches various limits to growth. I think Greece’s main problem wasn’t the debt per se, it was the fairly sudden fourfold increase in global energy costs that did them in.


  5. Difference between Greece and Shanghai …

    No easy money left in Greece to create bubbles or the happiness factor that turns people into subservient sheep ensuring incumbents keep getting elected and where we haved itchy Tories on the level of benefit cuts starting to be imposed that they drafted up before the last election.

    Commonality between Greece and Shanghai …

    Greece is a fine example of when all liquidity is removed and as we watch and observe the capital controls placed on Greek banks just like suspending short selling in Shanghai is an attempt to prevent the reality of the financial manipulation ever being exposed. Here is a thing though, those to points of economic interests were they directly or indirectly influenced through Libor or FX rigging?

    Chaos theory, a little butterfly flapped its wings and a financial tempest opened up. The underlying causation is the gradual lack of confidence in this FIAT ponzi world where to have a trillion Zimbabwe dollars is nothing. Imagine holding such a number then watch NIRP kick in LOL, worth nothing and you pay nothing to maintain nothing.


  6. “I would argue as follows: cheap money encourages margin borrowing to get silly; it also causes asset bubbles, and bubbles always pop in the end;”
    I would agree with you, but only ordinary people use “real money”, which is backed by their own assets. The people who benefit from so called cheap money are not ordinary people.
    The people who benefit use numbers on a computer screen and inflated assets to borrow against.
    Yes; mortgages are cheap, at the moment, but the time will come when it will be convenient for these to rise and the carpet baggers can move in. At the moment the housing market is slow and the last thing the system wants is a fall in the house prices.
    As for Greece their debt appears to be mainly caused by compound interest charged by?. [ECB loans Greece the money to pay the % on the IMF debt. Then IMF loan Greece the money to pay the % on the ECB debt] Greece does not actually receive any money, whilst the overall Greek debt increases.
    This debt is then sold at a discount to people who benefit from cheap money and are seen as an asset to borrow further cheap money to speculate with.
    Just a thought whilst the world as been watching Greece, Commonwealth of Porto Rico is in a much worse situation and may also default?
    Greece defaults what will happen to the Euro? Does it leave the Euro and introduce the Drachma, protecting a possible run on the Euro if Greece stays in the Euro area?
    If Porto Rico defaults? it only as the US $? Who stands to lose on the default? Will the US Treasury give Porto Rico a life line and offer both debt relief and %freeze until Porto Rico can sort itself out?
    Or will its debt be sold at a discount to people who benefit from cheap money and are seen as an asset to borrow further cheap money to speculate with?


  7. I think many of us go through it. I’ve certainly been thru the mixer – broke 3 ribs in the middle of it – don’t ask!


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