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.