7/10/2015

China intervention in market rout


China was forced to intervene in the stock markets following the recent sell down, wiping trillions of dollars from stocks and with many late entries suffering painful losses. The first day of intervention was quickly reversed and the rout appeared to continue to run to the abyss. China went in with more restrictive measures yesterday and for the moment has temporarily halted the fall and turned around with the biggest one day gain of 5.8% in the Shanghai stock market.

The measures introduced include halting trading of 50% of the stocks and forbidding big shareholders to sell their shares. Investigations are going on to look at malicious trading that contributed to the plunge in the market. Though the measures avoided a free fall and more losses, some market analysts as usual have started to express concerns about state intervention and not allowing market forces to do the damage.

What are these market forces? There will be the natural herd instinct, the panic buying and selling of investors at any sign or news that would affect stock prices. What is more dangerous is the collusion of big players, big funds, working in tandem to drive prices up and down at their callings. These are not the innocent market forces. These are big market manipulators. They operate as a wolf pack and reap great profits from the innocent small investors.

All the western modelled stock exchanges that allowed big funds to trade in them are faced with this risk of wanton manipulations. How can this be classified as market forces? These are not your normal investors but bandits that used their muscles to muscle in and out of a market like a bull in a China shop.

The only way to counter and prevent these big players from destroying a market and the wealth of small investors is to have a counter force in the form of govt intervention. It is only fair. Only silly govts and stock exchanges would think that govt intervention against these big forces is unacceptable and contrary to the operation of market forces. How can such big players and their irresponsible modus operandi to reap huge profits at the perils of small investors be allowed to run freely and unrestrained and be regarded as fair play, as market forces?

All govts and stock exchanges must have an instrument and even war chest to counter the destructive nature of the big players. Otherwise they are just being irresponsible and unfair to the small investors, like giving a licence to the big players to go for the kill, with their approval.

The Chinese intervention in the stock market is the right thing to do to prevent a very unfair and unlevel playing field. But what is important is also for the regulators and govt to manage a bubble and not allow a market to go wild. When a huge bubble is formed recklessly, the result will be a rout when the bubble is pricked. The Chinese govt must not let irrational exuberance to repeat again and for the present, how to unwind and deflate this bubble without causing too much damages. It was stupid to allow the market to run amok in the last few months and think that it was normal.

The volatility in the Shanghai stock market is not over yet and would take quite some time for the market to stabilize at a lower level.

41 comments:

Anonymous said...

May some Sin Expurts in Economics offer a solution to all stock investors and save them.

ℳatilah_$ingapura said...

This cannot end well lah. Politics + stock market == ???

Anonymous said...

I m curious. Has the new sgx ceo reverse, stop or otherwise any of the policies, decisions or directions of the previous ceo.

Anonymous said...

Chinese government playing and cheering a bubble. Now bubble burst.
Seow! Is to allow & cheer 90 million retail speculators to leverage & play around.
Bubble just burst. Sell on government back rebounds. Go study the 1990s Japanese government intervention on Nikkei.
No conspiracy, Redbean sir. Just plain greed, folly, pride and ignorance human nature. Chinese can be crazy & naïve herds...read Chinese history....."toa chiang pu ru"...."the knives & spears cannot penetrate the body"...Seow! Seow!

Chua Chin Leng aka redbean said...

Shanghai now +199, Hangseng now +504.

Anonymous said...

Chinese stocks PE ratio now 53, at early June 108.
Some perspective. It was a super bubble. At 53 it is still a bubble.

ℳatilah_$ingapura said...

The Chinese govt is being very shitty in this case, and is fueling a bubble which should burst---because the China has more than enough money to deal with the social ramifications of a market collapse.

China market has a lot of "not very well educated" speculators---farmers, housewives, students, general workers---all who are mainly new to the game, have probably never suffered debilitating losses, and have very little training or trading skills. Afterall, China's bourses are only a few decades old.

Culturally speaking, it is to be expected that the many of the Jo & Jane Blo's of China treat the stock market as a HUGE CHINESE GAMBLING DEN--- the only things missing are the concubines and the opium ;-)

By "re-flating" the market, the govt. is ENCOURAGING the average Jo & Jane to GAMBLE....especially those who've already lost. Although I don't gamble (anymore), I've visited enough gentleman's messes to know that a certain type of gamble exists: the one who cannot walk away and accept their loss. No, no. They must come back to "take revenge" and start betting crazy, like doubling down and betting big. In the end, they end themselves---completely BUSTED.

The China govt. should just let the market tank. And then spend money on food relief and keep the social order.

In a month or two, everything will be ok, and proceeding back to "normal"

Chua Chin Leng aka redbean said...

They need to engineer a soft landing like the over heated economy. Some jokers let the bubble blown too big and now very painful to deflate.

Everyone is watching how they cope with this mess. To continue to pump the bubble would only delay the bust for a bigger bust.

ℳatilah_$ingapura said...

I reckon although their intentions may be "good", what they're doing is INSANE.

80% of the "investors" in Shanghai and Shenzhen are individual Ah Chee Ah Chor's----just average fuckers with more of penchant for GAMBLING, than the more "rational" styles of investing: value (like Graham ad Buffet), and systems-based trading (not suka suka magic fortune-teller type). OK, to be fair, trading training for individuals is a booming business in China. But my trainer friends tell me that the Chinese are still lured by "fast big money" than trying to understand and rigidly implement the discipline required to work the various systems.

Of those 80% of individual "investors" in Shanghai and Shenzhen, many of the are LEVERAGED---i.e. they BORROW to "invest" in the stocks, and one thing you can be certain that CREDIT does: it helps the VELOCITY of money to drive up prices very quickly.

So when it comes down, everyone rushes for the exits and tries to SELL. However, the "regulators" clamped down on short sellers---a very silly move. Short sellers provide LIQUIDITY in falling markets: they are there to buy cheap stocks to COVER their shorts (borrowed securities), and by doing so inject liquidity into the market and more importantly: provide a "resistance" from further declines in price.

By re-flating the stock prices, the govt. has just wiped out many of the short sellers, which to them and the herd who doesn't "get it" and think that short sellers are EVIL!

In 2008, the China stock market crash was WORSE than this lah. Although there was panic and losses, China not only survived, but continued to grow.

Govt. intervention: bad news lah. Just take the pain, and allow everything to adjust. And yes, some fuckers will make lots of money.

Chua Chin Leng aka redbean said...

The small short sellers are part and parcel of the so called market forces. When the short sellers are big, the damage is big and the harm is big.

Say DBS is now $21. In an inactive market like SGX, the short sellers, with enough muscles, can keep selling down, and frightened small investors would rush to exit. The shortists can drive the price to say $16, more panic and more selling. And the price goes down further, maybe $12.

After overselling, they will buy back at the bottom. If not enough, they will borrow shares from silly shareholders and pay them 5% interest. These farkers are so happy for the 5% interest. And they cannot see how much they have lost when the price of their shares fell from $21 to $12.

In a big market, a near perfect market where there are enough counter players, the situation may not be that bad. But in a small and inactive market, a good share like DBS can be whacked till it looks like junk bonds.

ℳatilah_$ingapura said...

@ RB:

The opposite scenario is just as likely lah. You can't call it one way or the other.

An "inactive" stock is ripe for the picking / and or tinkering. There could also be some large institution (or even DBS themselves) to bid up the price/ trading volume to 22-23, and the short sellers all mati---having to cover their shorts at a higher than high price and still pay the 5% rental on stocks they borrowed.

There is no "safety" on the upside of a stock price. The price can go up and up to any level. If you're shorting, you're long time mati already lah, if you don't have stops in place.

ℳatilah_$ingapura said...

P.S. So many hedge funds kena wallop until bankrupt because they had billions of shorts in place, and were proven "wrong".

Anonymous said...

When Lim Boon Heng happily announced that Temasek's stock market assets had reached a new high .... I knew the market has topped.
I happily sold all my shares and shorted the China market via the etfs listed in the USA market.
Namely FXI and ASHR.

Do you think 20% of Temasek's shareholdings is from China?

Do you think Temasek is an excellent market timing tool?

Anonymous said...

There are at least three dimensions to the current debacle in China. If these three dimensions are out of control, expect the fallout to be worldwide. Some big economies might see it as negative in the short run but in their favour in the medium and long run. But some small economies might get a direct and indirect hit in the short, mid and long run. Expect the fallout to precipitate at least a mild winter in some economies, located ironically in the equatorial belt. Hopefully, in view of "MAD" ( 鱼死网破 ), the elephants can adopt a long term view and take a break from their "intense love making duels" in their ZhongNanHai abode ....... The collateral damages may spell the end of the Pacific Century ....... This is not a game of cards ..... It is your lives and millions if not billions more ......

Anonymous said...

In the near term, there should be a "truce" and the market gradually gravitating to a range-bound equilibrium. New initiatives to solve their economic and financial structural issues can then proceed. At the same time, they have to be "on-guard and be prepared" for multiple interest rate hikes by the FED in 2H15 and beyond subjected to known unknown and unknown unknown ....... If that happens, substantial capital outflows out of Asia could follow .....

Anonymous said...

"... multiple interest rate hikes by the FED in 2H15 and beyond ..."

Please lah.
In times of panic, people buy Treasury bonds, driving up the price.
When bond prices go up, the yields come down.
- the yields have not been able to breakout of a 30 year downtrend line.

Anonymous said...

Ha ha ha ....... thank you ...... please lah ..... u shall take over from now ....... ha ha ha

Chua Chin Leng aka redbean said...

Temasek was so happy and eager to make the announcement based on the prices at the peak. Very likely still sitting on them with new prices but not reflected or reported. Their gains could have been halved.

Anonymous said...

china already strike a balance between two extreme force - theory of YIN and YANG

it already achieved a state of equilibrium

market would gone up SOON.

Anonymous said...

Very good theory. Champion. ...... Good luck.

Anonymous said...

Very good mah ..... like that can pay all the senior mgt SG50 = 50 to 500 months bonuses mah ..... sinkies SG50 get $500 bonus ....... aristocrats must get at least 50 months bonuses mah ..... courtesy of un(willing) taxpayers ......

Anonymous said...

*typo should be (un)willing taxpayers ........ tgif. ....... $500 bonus tonight can go Geylang liao ....... eat D50 bao JIAK durians ...... lah ...... cheong arhhhhhhh ......... hope to see some the oldies there ....... can eat durians and after that la coconut juice together. .... 不见不散

Anonymous said...

Your wish has been heard by the all powerful divine lord and granted. This sin expurt is anon 1.36pm

Anonymous said...

Btw SG50 goodies pack inside have durians?

Anonymous said...

Very good postulation!

When in equilibrium, sure must up first then ying and yang can "strike" a balance assisted with extreme force ( and extreme groaning as well ). What a balance! What an equilibrium! Brilliant observation!

Anonymous said...

Geylangtology?

Anonymous said...

Perhaps the goodies pack should have a rubber balloon in the shape of a cow ........ then every PG can blow the cow ( rubber balloon, 吹牛 。。。气球 ) so big until nearly burst ( 吹到大大) and hang outside their windows .......

Anonymous said...

Aiya ..... no need economics expurt lah ..... just wear a "Patriotic" t-shirt can liao ...... everything 搞定 。。。。。

Anonymous said...

It was reported somewhere that some Chinese otc shares were sold to retail investors at PE ratio in 4 to 5 digits. New OTC regime oso otw in CASINO CITY ......

HO HSIEN LIAO ...... OOPS SHOULD BE HO SAY LIAO .....

Anonymous said...

Are these numbers the PE ratios of some Chinese small cap stocks and otc stocks sold to retail investors ....... ?

Anonymous said...

Since when which stock market in the world is politics-free ....... ?

Just like since when this world is free of scumbags and traitors. ...?

Anonymous said...

Conventional economics wisdom --- Creative destruction : 3 steps forward 2 steps backward

Anonymous said...

Holidays to China could be similar to Japan and Europe by year end and 2016 onwards. ...... ME and QE likely the way out ...... but China's exchange rate is fixed to a large extent ...... how they "devalue" it will be an issue ......

Anonymous said...

Ying-Yang-tology. ....? There are at least two whores. ..... oops two whore's men expurt in this ...... in MSN ....... they are self-proclaimed expurts in mei mei and .......

Anonymous said...

Tiok!

No need economics expurt.

Patriotic expurt can liao ......

Anonymous said...

If got expurt, India hosay liao.
Mamohan Singh World renown
Economist leh.
He somemore a prime minister
hor.

Anonymous said...

Ya lor, with many billionaires, who need expurts? PSLE graduates should stand for the next PE or even proclaim himself a potential PM or Finance Minister in the next GE and put himself up for contest. No need waste money study lah ..... waste time oso ..... tiok bor? This world expurt all BS. Who claimed to be expurt? Need patriotism can liao. Self-proclaimed expurt in patriotism. Got $13,500 deposit? When elected, u can volunteer yourself to be a patriotic Finance Minister, can liao.

straycatsgp said...

Redbean... admit it... China screwed up royally. They encouraged people to go into the stock market, gave them easy loans.
The man in the street just followed his neighbour... "if he buys stock, I can buy stock"
Somebody whispers this or that stock is good to buy, and everybody jumps in. Most, if not all of those "men-in-the-street" investors have no clue about trading. But the Chinese government let it go

Now the cat is out of the bag, and they're trying to correct it with radical measures.

I remember you advocating how the Shanghai market will teach the West a lesson...

hmmm I still wouldn't touch the Chinese market with a 10-foot pole..

Anonymous said...

straycat, china govt encourage people to buy stock

but they did not ask them to borrow money, sell their house, to buy stock or purchase stock at those ridiculously prices.

it is normal for nation to encourage people to do something.

"to have more CHILDREN."

are you going to blame the govt if you unable to take care of 10 children?

Anonymous said...

it is important to understand ANCIENT CHINA philosophy -yin and yang

it is about human behavior - interaction with other forces.

you could become millionaire overnight.

china market has achieve state of equilibrium - thanks to deep knowledge about yin and yang.

china market would gone up again.

but other market are going downhill.

be ware!!!

Anonymous said...

Yes, China has screwed it this time. That is why they need to manage a soft landing but if they still think they can prop up the market, they are in for very serious trouble.

They don't only miscalculated thinking they have a lot of money to cushion the fall. When it is not right it is not right. When it is not real, it is not real. They better listen to Warren Buffett and stop messing around with the stock market.

It was right to present a different model without massive manipulation. It is never right to create a bubble so big that it will only go bust.