China Central Bank Steps In To Bailout Stocks As Underwater Traders Pray For A Rebound

[magical thyme]

http://www.zerohedge.com/news/2015-07-05/panic-china-central-bank-steps-bailout-stocks

China’s equity miracle — the one bright spot that has so far served to distract the masses from rapidly decelerating economic growth and a bursting real estate bubble — is in deep trouble.

A dramatic unwind in unofficial margin lending channels such as umbrella trusts and structured funds which have together served to pump some CNY1 trillion into a market that was already red-hot, sparked and perpetuated a 30% decline in the space of just three weeks, pushing Beijing into panic mode and prompting simultaneous policy rate cuts along with a variety of other measures designed to stop the bleeding....


..."It's probably just a matter of time before the PBoC intervenes to provide Kuroda-style plunge protection when "sentiment" looks to be souring."

It took less than 24 hours for that prediction to be proven correct because on Sunday, the China Securities Regulatory Commission announced that the PBoC is set to inject capital into China Securities Finance Corp which will use the funds to help brokerages expand their businesses and reinvigorate stocks.

Maybe instead of a single black swan, there will be a flock of grey and black swans...

[WDIM]

1. So rich people are loaning rich people money so they can all be rich

While writing it off to the people of china so they can pay for it.

The corrupt systems are all collapsing. Perpetual growth and wealth only going to the top will always fail.

[Mojorabbit]

2. I do not know enough about global finance to understand

the meaning of all this. The instability in Greece, China on shaky ground. Is there any danger of contagion and another collapse of the economy in the US? The articles I am reading make me a bit nervous.

[leveymg]

4. In a word, yes.

But, there's also a balloon in US assets due to a (false) assumption of a safe harbour in US when Asia goes bust. China could easily drag down US markets - they are totally interlinked.

There was also a false assumption in London and the Paris Bourse in '29 that they were a nice safe alternative to Wall Street.

[leveymg]

3. Krugman described that sort of market failure during the '97 Asia Crisis as "Pangloss Value"

It's the bubble blowout that follows false assets market inflation due to faulty expectations of the efficacy of gov't bailouts of stock and real estate markets. He observed the contagient effect and that global hedge funds make a killing by reverse trading on these panics which spread their effects globally.

http://web.mit.edu/krugman/www/DISINTER.html

Back to PK home page

Paul Krugman

January 1998



WHAT HAPPENED TO ASIA?



It seems safe to say that nobody anticipated anything like the current crisis in Asia. True, there were some Asia skeptics - including myself - who regarded the claims of an Asian economic miracle as overstated, and argued that Asia was bound to run into diminishing returns eventually. And some people - again including myself - raised warning flags a year or two before the Thai crisis, noting that the current account deficits of Southeast Asian countries were as high as or higher than those of Latin America in 1994, and arguing that Asian economies had no special immunity to financial crises. But even pessimists expected something along the lines of a conventional currency crisis followed by at most a modest downturn, and we expected the longer-term slowdown in growth to emerge only gradually. What we have actually seen is something both more complex and more drastic: collapses in domestic asset markets, widespread bank failures, bankruptcies on the part of many firms, and what looks likely to be a much more severe real downturn than even the most negative-minded anticipated.

Also surprising has been the vulnerability of some (but not all) of the Asian economies to crisis contagion. The commonality of experience among the "MIT" economies (Malaysia, Indonesia, Thailand) may perhaps be understandable in terms both of their direct linkages and the extent to which they are exporting competing products. But South Korea is both far away from Southeast Asia - with minor direct economic linkages - and structurally quite different, having long since graduated from the highly labor-intensive products that still dominate MIT exports. How, then, did Southeast Asia's crisis infect Korea - indeed, how did "bahtulism" apparently mutate into an even more virulent strain by the time it reached Northeast Asia?

As is all too often the case, we find ourselves playing theoretical catchup - trying, after the fact, to develop a framework for thinking about events that have already happened. Yet this is by no means a pointless exercise. For one thing, this crisis is still unfolding at the time of writing, and policy is being made on the fly; any clarity we can bring to the discussion is bound to be helpful. Moreover, while this crisis did not play exactly in the way posited by standard currency crisis models, nonetheless those models were helpful in providing at least a first-pass framework for both understanding and policy formation - and those who knew those models were better forecasters than those who did not. The point is that while any model we may make of the 1997 Asian crisis will surely miss some crucial features of the next crisis to come along, it will still be helpful.

Anyway, enough apologies. The purpose of this paper is to sketch out a framework for understanding the nature of the Asian crisis. (It is an informal version of a more technical companion piece, Krugman 1998). I will argue that in order to make sense of what happened to Asia, it is necessary to adopt an approach quite different from that of traditional currency crisis theory. Of course Asian economies did experience currency crises, and the usual channels of speculation were operative here as always. However, the currency crises were only part of a broader financial crisis, which had very little to do with currencies or even monetary issues per se. Nor did the crisis have much to do with traditional fiscal issues. Instead, to make sense of what went wrong we need to focus on two issues normally neglected in currency crisis analysis: the role of financial intermediaries (and of the moral hazard associated with such intermediaries when they are poorly regulated), and the prices of real assets such as capital and land.

The paper is in five parts. The first part lays out the basic hypothesis in an informal way. The second part briefly reviews the standard analysis of the problem of moral hazard in financial intermediaries, then shows how it can lead to over-investment at the aggregate level. The third part shifts focus to asset pricing, showing how moral hazard can lead to over-pricing of assets; in the fourth part we then show how, with some plausible assumptions about government behavior, a moral-hazard regime with overpriced assets can become vulnerable to financial crises. A final section asks how reasonable a picture this is of the Asian crisis.

[CanonRay]

5. With Greece voting resoundingly "NO"

I think the shit might hit the proverbial fan come Monday am.