Here’s something interesting. While most people seem unconcerned – even amused – by China’s attempts to put a floor under the nation’s stock market, Peking University’s Christopher Balding says that Beijing might actually be trying to stave off a full-blown meltdown:
Let me give you a couple of ways the stock market fall is already threatening the broader real economy. First, despite reports that margin financing is declining, the real effect is just a shifting and reclassification to different debt and asset holders. The large majority of the nearly $800b in stock market support is provided not by high expectations and confidence but by loaned capital and heavily tilted to bank lending… …In short, losses and debt aren’t being erased, they are merely being reassigned. The debt bomb is not being defused.
He then goes on to talk about the rumors surrounding all those frozen stocks. As you’ve probably heard, a huge chunk of these frozen companies — thanks to their affinity for pledging shares as collateral — are now facing either default or huge margin calls once their shares resume trading. Apparently there’s some credence to this, and with 150 or so companies currently frozen, it’s not exactly a quick fix either, so its “easier to just freeze their shares as Beijing tries to come up for a plan.”
Adding to this mess is the possibility of China dragging its trading partners into a crisis as well, which we can already see in Australia’s declines.
He does however add that he might totally wrong here, even though evidence seems to point otherwise:
While we cannot prove the theory that Beijing is working to prevent a crisis, there is strong and rapidly growing evidence that Beijing is not spending $1.6 trillion USD for political credibility but to ward of much more jarring financial and economic pain. At the moment, the economic contagion theory is at least as true the theory of political credibility and evidence is mounting much faster and stronger as to its veracity.
Photo: Kevin Poh