China's Engineered Drop

Discussion in 'Band of Glockers' started by antediluvianist, Mar 2, 2007.

  1. antediluvianist

    antediluvianist Guest

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    http://www.stratfor.com/products/premium/read_article.php?id=284938



    GLOBAL MARKET BRIEF Global Market Brief Archive


    Global Market Brief: China's Engineered Drop
    February 28, 2007 0156 GMT


    China's Shanghai Composite Index tumbled 8.84 percent Feb. 27, its largest
    fall in a decade. Its sister index, the Shenzhen Composite Index, fell 8.54
    percent. The size of the drop in China is not significant in and of itself.
    On a number of occasions during the past year, the Shanghai Stock Exchange
    has experienced 5 percent plus daily reductions, and it has already boomed
    and busted once this decade.

    But that hardly means the development is insignificant. The fall is
    important both for how it happened and what it triggered.

    How it Happened

    This was an engineered drop.

    The Chinese government has become increasingly concerned about levels of
    investment in its economy or, more accurately, the sheer amount of money
    that is chasing projects. State firms with limitless access to subsidized
    capital from state banks have used that access to launch thousands of
    nonprofitable firms. This glut in "investment" money drives up the cost of
    commodities and adds industrial capacity without actually producing
    anything of much use, making life more difficult for the average Chinese
    and unduly harming relations with foreign powers that face a glut of
    otherwise noncompetitive Chinese goods.

    This penchant for overinvestment has now spread to the stock market in two
    ways. First, the same politically connected government officials who
    started dud companies are taking out loans to buy shares, or are using
    shares they already hold as collateral for new loans. Second, ordinary
    Chinese citizens have started borrowing -- sometimes against their homes --
    in order to play the market. In January, the number of total traders on the
    Chinese exchanges grew by 1.38 million, an increase of 134 percent from a
    month earlier, while stock turnover was up 700 percent from a year earlier.


    The net result is an absurd stock surge with no basis in fundamentals. At
    present, some Chinese banks now have price-to-earnings ratios higher than
    financial behemoths such as Deutsche Bank and Chase, despite deplorable
    management and a history of highly questionable lending policies.

    For the past few months, the government has been working to drive down this
    speculative investing. On Feb. 26, China's State Council launched a new
    "special task force" that accurately could be referred to as the
    "get-those-idiots-to-stop-borrowing-to-gamble-on-the-stock-exchanges" team.
    Its express goal is to get the Chinese domestic security brokers to lay off
    such speculative decision-making, while also putting a crimp in the source
    of the subsidized capital.

    Day one started by the script, and Beijing is likely quite pleased with the
    way things are going (or at least it was until its actions unintentionally
    triggered a global meltdown). Also, since the Shanghai exchange is actually
    still up 3 percent for the past week despite suffering its largest drop in
    a decade, the State Council probably hopes for more drops in the days
    ahead.

    What it Triggered

    But the rest of the world took a different lesson. Why the Chinese stock
    crash occurred was unimportant to the outside world, only that it did --
    and that it affected everyone else.

    For the first time, China has become the trendsetter in the global stock
    community. Normally, the U.S. exchanges -- especially the S&P 500 index and
    the Dow Jones Industrial Average -- set the tone for global trading
    patterns. Not on Feb. 27. This time, China led Asia to a wretched day. The
    wider the contagion spread, the more margin calls were forced to be called
    in. (If an account's value falls below a minimum required level, the broker
    will issue a margin call for the account holder to either deposit more cash
    or sell securities to fix the problem.)

    As the drops snowballed, Europe filed in dutifully behind, mixing the China
    malaise with its own nervousness about overextended markets in Central
    Europe and the former Soviet Union. By the time markets opened in the
    United States -- where investors already were fretting about the subprime
    mortgage markets -- the only question remaining was how far U.S. markets
    would descend. In the end, the Dow dropped by the most since the fall
    triggered by the 9/11attacks.

    So why has this not happened before now? As China's market capitalization
    has increased, its links to the global system have increased apace. These
    links have developed very quickly, and with few controls. The Shanghai
    exchange, for example, more than tripled in total value in 2006 to more
    than $900 billion -- and much of the rapid-fire initial public offerings
    (IPOs) of Chinese banks on the Hong Kong and other international exchanges
    are not included in that little factoid. Indeed, China's mainland exchanges
    are only the tip of the iceberg -- and they certainly do not include
    foreign firms that are heavily invested in the mainland.

    Two years ago, China's market capitalization was too small for its problems
    to impact the global system. Now, between ridiculous foreign subscriptions
    to IPOs, irresponsible corporate policies and irrational valuations all
    around, that capitalization is to a level -- around $1.3 trillion -- where
    its integration with the global system via funds and margins makes China a
    sizable chunk of the international financial landscape. The insulation that
    once protected international exchanges from Chinese policies is gone, which
    makes the international system more vulnerable to Chinese crashes.

    Feb. 28 and Beyond

    Follow-on crashes can come from one of three places.

    First, the Chinese believe their exchanges are massively overvalued (hence
    the engineered crash). They will do this again, and are not (yet)
    particularly concerned with the international consequences. China planned
    to dampen its own stock market, not the world's markets. Along with the
    rest of the world, Beijing did not expect the contagion effect to be so
    extreme. Yet, for now at least, China's own exchanges are its primary
    concern, and it will act according to that belief.

    Second, everyone else now is going to chew on the fact that Beijing did
    this intentionally. They will either agree with the Chinese that the
    exchanges are overvalued and that additional measures are needed, or they
    will be terrified that Beijing did this intentionally and not care about
    the reasons. Whether what is sold is a domestic Chinese firm or a foreign
    firm invested in China does not matter much. Neither does it matter if the
    stock is on an exchange in China or abroad. Either way, the reaction will
    be the same: Sell.

    Third, trading in 800 of the 1,400 stocks on the Shanghai exchange was
    suspended during the sudden drops Feb. 27; they have a lot farther to fall,
    even without any engineered drops caused by panicky selling.

    Considering the flaws on which the Chinese system is based, this certainly
    will not be the last engineered drop. In theory, the move will make foreign
    investors far more cautious before diving into the Chinese system, but as
    longtime Stratfor readers know, we have been wrong on the timing of that
    particular development before.
     
  2. revo

    revo

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    The Chinese have a poorly managed economy. That is why they will not recover. It is the start of the long slide down. Mark my words.
     

  3. maskytrading

    maskytrading Guest

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    Too much money(buying) invested in the stocks without solid fundamentals will eventually result in a massive sell down (what goes up must come down)...such is the reality of playing in the exchanges...however what is sad here is that the Chinese government itself castigated the private players by letting loose a "task force" to dampen or quell investor/investment frenzy. (Shades of the tanks in Tiananmen Square)...With this kind of behavior, China still cannot be called a "newborn capitalist", it is still an "old totalist"

    And one of the characteristics of a stock market is it's being "makahiya" or in Ilonggo "huya huya"(sorry but I do not know the name of this plant in English)...it spreads its' leaves wide in the sun but when you brush it lightly it folds up in itself immediately. The Chinese event is not just a slight brush but a slap.

    I think foreign "butterflies" who bring in $$$$ to third world stock markets around the world will leave China and fly and land where ever.
    PSE is nearby...If the PSE amount averages 10B Php daily, that means they're here, if not, they flew elsewhere...Or maybe I'm just dreaming...That's right and that's why I play at the races, este, stock market.
     
  4. antediluvianist

    antediluvianist Guest

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    "If the PSE amount averages 10B Php daily, that means they're here, if not, they flew elsewhere..."

    Alas, for most Western investors the Philippines is a minor dot , lumped into "Asia", the biggest part of which is "China".

    We should look at volume of turnover on the Philippine Stock Exchange, as you said, and at the peso exchange rate, which is in fact weakening.

    And if Japan increases its interest rate later this year - the consensus is it probably will - that will dry up some liquidity in the world equity markets which of course will cause stock prices to fall. (The Yen interest rate has been so low for a long time - presently 0.5% - that investors/institutions have engaged in "Yen carry-trade" - they borrow Yen at this very low interest rate and then convert to Dollars, Yuan, whatever and then invest that into bonds and stocks all over the world that earn much more than 0.5%. But that HUGE bloc of invested funds will shrink if Japan increases its interest rate.)

    Well I started selling heavily yesterday , except for PAX and ALI, and will continue to do so. I hope world equities and our own Philippine stock exchange stop dropping and stabilize soon, but meanwhile I'm doing a tactical retreat. Can buy back later at cheaper prices. I hope the LONG-TERM trend UP remains intact but our market here is hostage to what happens in the rest of the world.
     
  5. zorkd

    zorkd

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    ang importante ay kung mag mumura ba lalo' ang mga norinco na baril or mamahal?

    :supergrin:
     
  6. revo

    revo

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    Forget Norinco. You are only supporting the Red Army.

    Buy Armscor.

    Forget the investment speculation game.

    Look for good solid companies with good management that you know about and you can trust and invest there.
     
  7. antediluvianist

    antediluvianist Guest

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    If the Peso continues to weaken - one of the contributing factors to that would be if the foreigners pull much their "hot money" funds out of our stockmarket - well, imports in general will become more expensive.

    but the prices of guns charged by gunstores seem only to go in one direction anyway - UP. Did anybody see a decrease in the prices of imported guns and accessories/parts when the Peso STRENGTHENED this past year?

    Anyway, there are other factors involved aside from the exchange rate - slow volume of sales, long carrying time of inventory, lots of debt, etc..
     
  8. maskytrading

    maskytrading Guest

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    With all the dampening events happening the past week(China and New York Exchanges Drop including PSEs last Thurs.and Fri.)resulting in edgy investors, my tactic is to get in and get out as quickly as you can. GEO has been my pet issue for the last week or so...very big difference between lows and highs for intraday trade profit taking for more than 2 weeks already. BTW, Sir Ante, shouldn't we be posting this in your other thread?
     
  9. antediluvianist

    antediluvianist Guest

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    yes but i clicked on the wrong button "new thread" or something like that instead of "reply"
     
  10. horge

    horge -=-=-=-=- Lifetime Member

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    IMO lang, but, corrections --whether planned or unplanned, can tend
    to take on a life of their own. Doesn't make much difference to the
    investors who lost a bundle, anyway.

    In fact, many of the claims of 'pre-planning', in the wake of costly
    corrections seem more like spin and damage control to excuse fund
    managers who should've been protecting their clients' money, and who
    created overripe conditions for the mess in the first place.

    Having said that, if you want this thread merged with the old one,
    just post a link to the latter, and I can try. Or, you can just
    leave this one to take on a life of its own...

    ...whether its independent appearance was unplanned or not.
    :)


    If
     
  11. antediluvianist

    antediluvianist Guest

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    Oh, well, looks like it might be a bother to merge this thread with the other one now, so let's just let it ride......

    Just would like to add, since I have this posting anyway.... Guns are cheap compared to playing the stock market. Over a 6-month period, a lot of investors will earn or lose enough to buy, or equivalently have to sell, SEVERAL guns. Or one big cannon.

    And in the Philippines guns tend to be much more expensive than they are in the U.S. (a new Glock 17, for instance, costs about $660 here. ) For stockmarket investors in the U.S., hell maybe the stockbroker's commissions alone will amount to as much as a (relatively cheaper U.S.-sold) Glock over 6 months.
     
  12. isuzu

    isuzu

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    Checked the closing results and it doesn't look promising, not just yet. Dow, TSE were down as well as oil, who "survived" the decline for most of the week. Even people here have started to slow down in their spending.
     
  13. isuzu

    isuzu

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    I'd disagree. Their economy has been tremendously growing, and several attempts have been made to slow it down to a much desired level. They've been recovering after what happened, albeit little by little, but the ripple effect that it did to the rest of the world's economy is something that we have to think about. That is why some analysts termed what happened as the "Chinese Tsunami;" traders in the US were already in a sort of disarray on what to do when they found out what was happening in China even before trading started.

    China's influence in the international market is so strong, that when something happens to their economy, the rest of the world takes notice.

    Just like what Ante said, it's an "engineered drop."
     
  14. revo

    revo

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    It's all a house of cards.

    The rate of the Chinese currency is kept artifically low by the Communist government thus making manufacturing artifically cheap.

    Growth is not the criteria for a robust economy. One has to look at long term sustainability as well.

    It's a only a matter of time now before it collapses due to its own weight.
     
  15. isuzu

    isuzu

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    That's probably why they want to put brakes on their economy. China uses a lot of metals nowadays, and prices have been steadily increasing. With the increase in prices of metals, the Chinese might not be able to keep production costs down. Prices of metals have gone down since the stock market drop in China. Oil held its ground for a couple of days, but eventually lost 50 cents in trading yesterday.

    A collapse of the Chinese economy is something that I wouldn't want to see. It can create a huge imbalance in the world's economy, and worse, could create conflict.
     
  16. revo

    revo

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    The Chinese leadership is not taking care of its own people. It's a repressive government.
     
  17. maskytrading

    maskytrading Guest

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    Whats happening in China is normal. Stock markets cannot have lines that go up like rockets blasting off; economies also cannot have booms all the time, recession is always a partner, just like night and day, left and right, birth and death etc. But with so many foreign investors in China in almost all the big industries like vehicles, appliances, drinks because it is the worlds potential biggest single market for anything and everything, China's economy will not collapse, it will just slow down a little...Gone are the days of the Maos' repressive governance including his peers who have all died, the present leadership is of a different outlook altogether.
     
  18. revo

    revo

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    China's gov't no repressive ? You don't know what you're talking about.

    http://www.youtube.com/watch?v=blC-EXv1Al8

    Look at this video very closely. It's self explanatory to what they do to people who are out of line.
     
  19. bulm540

    bulm540

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    I rest my case.
     
  20. akula

    akula BizDuc NM Millennium Member

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    Engineered or Not, it's costing me my paper profit!