After the China stock market crash, the situation might be a lot worse that it initially looked – which was already pretty bad.
If things continue on the path they’ve been taking, China will show its third consecutive quarter of negative GDP growth. Some are downplaying these figures, but once adjusting for inflation the picture is clear. The nation has been relying on its stock market to transition to a consumer economy.
About 80% of the trading on the Chinese stock market is done by individuals. Those individuals, based on promises and dreams, had to borrow money in order to enter the market. This is called “leveraged buying”, which, on the surface, doesn’t sound all that bad.
A “lever” is a simple tool used for applying mechanical advantage to solve a problem. Picture a teeter totter. A person places him or herself on one end, and another person sits on the opposite end. As long as the two are equally weighted, both can push off and enjoy the ride. If one weighs more than the other, the lighter person gets a ride straight to the top. While they might enjoy the view, if the heavier person suddenly gets off, the crash isn’t very pleasant.
In our example, as ordinary individuals took out loans and bought into the stock market, the economy was already slowing. Once the market started to drop, savvy investors sold their stocks in order to have enough money to pay their loans. Those who were caught off guard were in a bad spot, owing money they simply no longer had.
China’s market had what traders called a “Dead Kitty” bounce on 7/7/2015. Communist authorities dispatched police and security guards to “encourage” people to buy – even “insider buying” was permitted. Those who wanted to profit by “selling short” (a perfectly legal way to make money as stocks go down) were arrested.
The market fell over three trillion dollars – and was still considered highly inflated. China took action, “nationalizing” around $6 trillion in losses.
Some might read “nationalizing” and think the government was “bailing out” or “saving” those who’d lost money – but what it really meant was that money was taken from the People and redistributed to others.
Breitbart News has even compared what’s going on to our own Lehman Brothers debacle (“China’s Lehman Brothers Weekend Begins”), indicating that “Red Dragon” had suffered a financial collapse equivalent in degree to the U.S. stock crash in 2008-9. Economists in China aren’t being so kind – they’re equating it to the same magnitude of the crash that preceeded the Great Depression.
Unlike the U.S., which used taxpayer money (in the form of a formal government bailout) to “stabilize” markets, the Chinese government told the banks to use their own funds to back the current $8 trillion stated value of all of China’s 2800 listed stocks – but the savings of those who’d wisely stayed out of the market on the line.
Official figures show growth rates of around 7%, but the market had risen over 150% – that’s an enormous bubble.
What’s worse, the after-tax real “growth rate” of the market was actually negative, according to Lombard Street Research.
The Debt “Bomb”
China is buried under “crippling local government and corporate debt”, according to a Breitbart News report (“China Debt-Bomb Fuse is Burning“).
The country had a plan to restructure its debt by having banks rollover all their non-performing state-owned enterprise loans, and put their faith in individual investors to buoy up the banks by “investing” in (insolvent) state-owned companies.
Obviously that didn’t work.
The “creative financial-engineering” scheme to inflate the stock market has driven the country to a 1929-style stock crash, and the the Chinese Communist Party just forced state-owned banks to nationalize another $8 trillion loss.
$8 trillion is right around 100% of China’s GDP.
That’s the magic question: what’s going to happen next?
To answer that question, let’s ask some.
If all of a sudden your investments were worth nothing (including the time that you invest by going to work every day), what would you do to keep your finances afloat?
- You’d go around to any friends/family that owed you money and “collect” on those debts
- You’d pay for everything with credit and hoard anything of value
- You’d sell whatever you could (at discounted “quick-sell” prices) to try and bring in money
- You’d cut non-essentials (eating out, cable-TV, Internet service, etc.)
- You’d stop making payments against your debt (credit cards, car loans, mortgage, etc.)
- You’d delay paying bills (water, sewer, trash, etc.)
- When the bills started piling up, you’d disregard the bill collectors
- You’d cut back on essentials (food, etc.)
- You might even start asking friends/family for loans to help you out
- Eventually, if things got really bad, you’d take what you needed to feed your crying children – with whatever force was necessary
Why wouldn’t a country do the same?