China’s stockmarkets crash, again

Krisis Finansil Cina: Perspektif Kebijakan Moneter, Corporate Finance (Analisa Laporan Keuangan), dan Investment Banking (Valuasi Nilai)
oleh : Sando Sasako
Jakarta, 28 Maret 2016

ISBN 978-602-73508-5-4

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Krisis Finansil Cina
 


Daftar Isi

Kata Pengantar iii
Kata Pengantar dalam buku ‘Corporate Financing’ v

Daftar Isi vii
Daftar Tabel x
Daftar Bagan xi

Pendahuluan 1
Masalah Pengukuran 1
Data, Informasi, Fakta 2
Data Mining 4
Pemilahan Data 5
Business Intelligence 7
Analisa Kuantitatif 8
Analisa Data 8
Self-Organising Map 9
Hambatan bagi Efektivitas Analisa Data 11
Confirmatory Data Analysis 11

Analisa Finansil 11
Standar Akuntansi Keuangan (PSAK, GAAP, IFRS) 12
Peran Perusahaan Audit dalam PSAK 12
Analisa Finansil sebagai Alat Ukur Kinerja Keuangan 12
Analisa Fundamental 13

Rasio-rasio Finansil 14
Pertumbuhan 14
Produktivitas 14
Kontribusi terhadap Stakeholder 14
Dividend Policy Ratios 14

Rasio-rasio Aktivitas Usaha 15
Perputaran aset (asset turnover) 15
Perputaran aset rata-rata (asset turnover) 15
Rasio perputaran aset tetap (fixed assets turnover) 15
Perputaran piutang (receivables turnover) 16
Rata-rata periode penagihan (average collection period) 16
Perputaran inventaris (inventory turnover) 16
Periode inventaris (inventory period) 16

Rasio-rasio Likuiditas 17
Rasio lancar (current ratio, CR) 17
Rasio modal kerja (working capital ratio) 18
Rasio cepat (quick ratio, QR) 18
Rasio kas (cash ratio) 18
Pendapatan lancar (current income) 19
Rasio pendapatan bunga (Time Interest Earned, Interest Coverage) 19
Rasio investasi terhadap kebijakan (investment to policy ratio) 19
Rasio utang lancar terhadap inventaris (current debts to inventory ratio) 19

Rasio-rasio Profitabilitas 19
Marjin laba kotor (gross profit margin) 20
Marjin laba bersih (net profit margin) 20
Return on Equity (ROE) 20
Return on Asset (ROA) dan Return on Capital Employed (ROCE) 20
Return on Capital (ROC) dan Return on Invested Capital (ROIC) 21
Return on Investment (ROI) 21
Beban bunga (Interest Coverage, Times Interest Earned) 22
Beban finansil (financial leverage) 22
Efisiensi beban finansil (efficiency of financial leverage) 22

Rasio-rasio Struktur Modal 23
Rasio utang terhadap modal (debt to equity ratio) 23
Rasio kapitalisasi (capitalisation ratio) 24
Tingkat pertumbuhan ekuitas (equity growth rate) 24
Beban finansil (financial leverage) 24
Rasio utang (debt ratio) 24
Rasio modal saham terhadap aset tetap bersih 24
Rasio utang lancar terhadap modal saham (Current Debts to Net Worth Ratio) 24
Rasio kewajiban total terhadap modal saham (Total Liabilities to Net Worth Ratio) 25
Rasio aset tetap terhadap modal saham (Fixed Assets to Net Worth Ratio) 25

Rasio-rasio Kecukupan Modal 25

Solvabilitas 25
Solvency ratio (SR) 26
Rasio utang terhadap aset (Debt to Asset Ratio, DAR) 26
Rasio utang terhadap modal (Debt to Equity Ratio, DER) 26
Kemampuan laba menutup biaya tetap (Fixed Charge Coverage). 26
Rasio pinjaman terhadap aset (Loan to Asset Ratio, LAR) 27
Rasio pinjaman terhadap simpanan (Loan to Deposit Ratio, LDR) 27

Risks vs Rewards 27
Risiko Mencari Keuntungan 28
Efek Domino Risiko 29
Rent-Seeking Behaviours 30

When the Deal Slips Away 32
Indikator Kesulitan Finansil 34
Indeks Kerentanan 36
Stress Test 38
Indeks Stabilitas Sistem Keuangan 40
Financial Stability Index 43
Indeks Kesehatan Finansil ala IMF 44
Laporan Stabilitas Finansil Global ala IMF 48
Operasi Moneter 48
Inflasi Terencana sebagai Prasyarat Kestabilan Finansil 50

Dinamika Pasar Finansil 52
Dinamika Aset Finansil 53
Kerapuhan Sistem Finansil 54

Krisis Finansil 55
Menelikung Krisis Finansil 56
Kasus LTCM 57
Krisis Subprime Mortgage 60
Kasus Lehman Brothers 63
Krisis Eurozone 64
Spiral Kekacauan Krisis Eurozone 65
Debt Exposures of PIGS 66
AS 68
Inggris 69
Jerman 69
Perancis 70
Jepang 71
Yunani 72
Irlandia 73
Italia 74
Portugis 74
Spanyol 75
Some PIGS are More PIGS 76
Krisis Finansil Cina 77
Kenapa Cina menjadi begitu penting? 78
Bermain dengan nilai tukar 81
Pasar CNH 82
Dominansi nilai tukar CNH terhadap CNY 87
Qualified Foreign Institutional Investor 90
Renminbi Qualified Foreign Institutional Investor 90
Qualified Domestic Institutional Investor 91
Qualified Domestic Individual Investor 91
Shanghai-Hong Kong Stock Connect 91
Pilot Free Trade Zones 91
Mainland-Hong Kong Mutual Recognition of Funds 92
Kenapa pasar finansil Cina bisa crash? 92
Ketika gelembung finansil Cina mulai pecah 93
Pelonggaran likuiditas sebagai solusi ancaman resesi 94
Aksi pemadam kebakaran ala pemerintah Cina 96
Permasalahan fundamental ekonomi Cina 99
Beban utang Cina 101
Kebijakan dan otoritas moneter Cina 102
Pasar obligasi Cina 103
Obligasi Panda 105
Obligasi dim sum 106
Daftar emisi obligasi dim sum 108
Aksi pemerintah Cina terhadap masalah tunggakan utang 110

Policy and Politicisation 113
Primary Dealer 113
Solusi Teoritis, Bisa dan Benarkah? 116
Kebijakan Too Big To Fail 117
Cashless Solution 118
Minyak sebagai Mata Uang dan Sumber Kemakmuran 120
Negative Interest Rates Policy 125

Kas 129

Pengadaan Aset 130
Asset Investment 130
Asset Financing 131
Capital Expenditures 132
Menghitung Biaya Modal 134
Biaya utang 134
Biaya saham preferensi 134
Biaya laba ditahan 134
Biaya ekuitas eksternal 135
WACC 135
Biaya modal marjinal 136
Break point 136

Off-Balance Sheet Financing 136
Perubahan Portofolio The Fed 136
OBS sebagai Produk Inovasi Menyembunyikan Risiko Finansil 137
MBS sebagai Produk Rekayasa Finansil Penyebab Krisis 2008 139
Bencana Prilaku Berisiko Berlebihan 141
Bertaruh pada Aset Fiktif 142
Akuntansi OBS 144
Fleksibilitas Pasal Karet 145
Penyesuaian Pasal Karet 146
Memanfaatkan Celah Hukum 147

Equity Financing 148

Debt Financing 149

Struktur Modal 152
Teori Struktur Modal 153
Teori Pensinyalan 154
Struktur Modal dalam Praktek dan Realitas 155
Menghitung Tingkat Optimal Struktur Modal 155
Besar Beban Operasi 156
Analisis EBIT/EPS terhadap Efek Beban Finansil 157
Besar Beban Finansil 157
Besar Beban Total 158
Efek Struktur Modal terhadap Harga Saham dan Biaya Modal 159
Likuiditas dan Arus Kas 159

Struktur Finansil 160
Ukuran Optimal Beban/Struktur Finansil 161

Valuasi Nilai 162
Corporate Financing vs Investment Banking 163
Pentingnya Valuasi Nilai 164
Valuasi Usaha 164
Komponen Pendapatan 166
Komponen Neraca 167
Komponen Arus Kas 167

Time Value of Money 168
Future Value 169
Future Value Interest Factor for i & n 169
Present Value 169
Present Value Interest Factor for i & n 169
Future Value untuk Anuitas Biasa 169
Future Value Interest Factor untuk Anuitas Biasa 170
Future Value untuk Anuitas Awal 170
Present Value untuk Anuitas Biasa 170
Present Value Interest Factor untuk Anuitas Biasa 170
Present Value untuk Anuitas Awal 170
Present Value untuk Perpetuities 171
Present Value untuk Aliran Arus Kas Variabel 171
Future Value untuk Aliran Arus Kas Variabel 171
Future Value untuk Periode Semesteran atau lainnya 171
Amortisasi Pinjaman 172

Referensi 173
Web 173
e-book 177
Buku 180

Daftar Lampiran

Lampiran – Variabel yang umum dipakai sebagai ukuran stabilitas finansil 181
Jenis data yang digunakan dalam laporan stabilitas finansil beberapa bank sentral (AT-ES) 181
Jenis data yang digunakan dalam laporan stabilitas finansil beberapa bank sentral (GB-TR, ECB, IMF) 182
Variabel yang umum dipakai sebagai ukuran stabilitas finansil 183

Lampiran – Ukuran dan skenario dalam laporan stabilitas finansil global, Okt. 2015 185
Ukuran likuiditas 185
Ukuran utang korporasi di pasar emerging 187
Asumsi dalam skenario gangguan pada pasar aset global 189
Mekanisme transmisi kejutan dalam skenario gangguan pada pasar aset global 190
Asumsi dalam skenario normalisasi yang berhasil 191
Mekanisme transmisi kejutan dalam skenario normalisasi yang berhasil 192

Lampiran – Ukuran Kerentanan Finansil 193
Indikator valuasi risk appetite / aset 193
Indikator ketidakseimbangan non-finansil 194
Indikator kerentanan finansil 195
Indikator Kebijakan Macroprudential 196

Lampiran – Daftar Indikator dalam ISSK Bank Indonesia 197

Lampiran – Profil Cina 199

Lampiran – Jumlah (instrumen) utang Cina menurut emiten, domestik, nasional, internasional, 2015Q2-2015Q4 201

Daftar Tabel

Table 1 – Aktivitas M&A di business intelligence dengan nilai >$100 juta, 2009-2014q1 7
Table 2 – Beberapa indikator kebijakan macroprudential 36
Table 3 – Indikator pengukuran stabilitas sistem keuangan 42
Table 4 – Indikator utama kesehatan finansil ala IMF 45
Table 5 – Indikator tambahan (encouraged) bagi kesehatan finansil ala IMF 45
Table 6 – Indikator parsial dan bobot dalam indeks stabilitas perbankan Republik Ceko 47
Table 7 – Indikator kesehatan finansil ala ECS (Macro-Prudential Indicators) 47
Table 8 – Tiga skenario stabilitas finansil 48
Table 9 – Operasi moneter menurut standing facility 49
Table 10 – Pentingnya likuiditas yang lentur (resilient) 50
Table 11 – Penambahan likuiditas menurut jenis instrumen OPT 50
Table 12 – Penyerapan likuiditas menurut jenis instrumen OPT 50
Table 13 – Nilai ekspor dan impor AS-Cina untuk 5 produk utama, 2014-2015 (US$ juta) 100
Table 14 – Nilai ekspor dan impor AS-Cina untuk produk teknologi tinggi, 2015 (US$ juta) 100
Table 15 – PDB Cina, 2010-2014 dalam milyaran ¥ dan US$ 101
Table 16 – Nilai obligasi pemerintah dan korporasi di Cina, 2002-2015 (US$ milyar) 101
Table 17 – Buletin harga obligasi di pasar uang Hong Kong, 11 Maret 2016 107
Table 18 – Daftar 22 primary dealer di Amerika Serikat, 2014 114
Table 19 – Beberapa veteran primary dealer pilihan Bank Sentral Amerika 114
Table 20 – Daftar 19 primary dealer di Indonesia, 2014-2015 115
Table 21 – Nilai derivatif 25 bank terbesar di AS, Nov. 2015 (US$ milyar) 119
Table 22 – Ringkasan Perlakuan Transaksi Sekuritisasi menurut UK GAAP 145
Table 23 – Jenis data yang digunakan dalam laporan stabilitas finansil beberapa bank sentral (AT-ES) 181
Table 24 – Jenis data yang digunakan dalam laporan stabilitas finansil beberapa bank sentral (GB-TR, ECB, IMF) 182
Table 25 – Variabel yang umum dipakai sebagai ukuran stabilitas finansil 184
Table 26 – Ukuran likuiditas 186
Table 27 – Ukuran utang korporasi di pasar emerging 188
Table 28 – Asumsi dalam skenario gangguan pada pasar aset global 189
Table 29 – Mekanisme transmisi kejutan dalam skenario gangguan pada pasar aset global 190
Table 30 – Asumsi dalam skenario normalisasi yang berhasil 191
Table 31 – Mekanisme transmisi kejutan dalam skenario normalisasi yang berhasil 192
Table 32 – Indikator valuasi risk appetite / aset 193
Table 33 – Indikator ketidakseimbangan non-finansil 194
Table 34 – Indikator kerentanan finansil 195
Table 35 – Indikator Kebijakan Macroprudential 196
Table 36 – Daftar indikator pembentuk ISSK 197
Table 37 – Profil Singkat Cina 199
Table 38 – Indikator Ekonomi Cina, 2011-2017 200
Table 39 – Utang Cina menurut emiten, domestik, nasional, internasional, 2015Q2-2015Q4 202

Daftar Bagan

Figure 1 – Diagram alur hierarki DIKW (Data-Information-Knowledge-Wisdom) 3
Figure 2 – Kontinuum pemahaman dalam konteks DIKW 3
Figure 3 – Proses data mining 4
Figure 4 – Hubungan antara Data, Informasi, dan Intelijen 6
Figure 5 – Analisa eksplorasi data 9
Figure 6 – Taksonomi ketidakpastian 27
Figure 7 – Igloo ketidakpastian 28
Figure 8 – PV perusahaan berutang 32
Figure 9 – Skema indeks kerentanan dan komponennya 37
Figure 10 – Siklus pengawasan macroprudential 38
Figure 11 – Prasyarat bagi antisipasi dan pencegahan ketidakstabilan sistem finansil 39
Figure 12 – Hubungan antara stabilitas sistem finansil dan stabilitas moneter 39
Figure 13 – Keterkaitan antar-variabel dalam BAMBI (Banking Model of Bank Indonesia) 41
Figure 14 – Beberapa indikator pembentuk Indeks Stabilitas Sistem Keuangan (ISSK) 42
Figure 15 – Peran Bank Indonesia dalam menciptakan stabilitas moneter 49
Figure 16 – Bentuk interaksi antara BI, pempus, dan pemda dalam mengendalikan inflasi 51
Figure 17 – Perkembangan aktivitas perbankan internasional 52
Figure 18 – Aset Riel dan Aset Fiktif Bank-bank di AS, 1995–2000 58
Figure 19 – Nilai Derivatif dan Modal 25 Bank AS Ternama (US$ milyar) 59
Figure 20 – CDOs direpresentasikan dalam bentuk building blocks, The Big Short, 2015 60
Figure 21 – Pasar rumah di AS, 1989-2006 61
Figure 22 – Pemetaan proses penularan krisis finansil 2008 62
Figure 23 – Pinjaman sektoral dari Bank of England, 1997-2012 63
Figure 24 – Utang-piutang PIGS 67
Figure 25 – Utang AS ke 4 negara adidaya dan PIGS 68
Figure 26 – Utang Inggris ke 4 negara adidaya dan PIGS 69
Figure 27 – Utang Jerman ke 4 negara adidaya dan PIGS 70
Figure 28 – Utang Perancis ke 4 negara adidaya dan PIGS 71
Figure 29 – Utang Jepang ke 4 negara adidaya dan PIGS 71
Figure 30 – Utang Yunani ke 4 negara adidaya dan PIGS 72
Figure 31 – Utang Irlandia ke 4 negara adidaya dan PIGS 73
Figure 32 – Utang Italia ke 4 negara adidaya dan PIGS 74
Figure 33 – Utang Portugis ke 4 negara adidaya dan PIGS 75
Figure 34 – Utang Spanyol ke 4 negara adidaya dan PIGS 76
Figure 35 – Cadangan Devisa Cina, Des. 1999 – Jan. 2016 78
Figure 36 – Tiga Kekuatan Ekonomi Dunia 79
Figure 37 – Nilai perdagangan Cina dengan negara lain (impor + ekspor) 80
Figure 38 – Nilai tukar bilateral yuan terhadap 3 mata uang dunia, USD, ¥, dan €. 81
Figure 39 – Cadangan devisa Cina dan nilai tukar CNY dan CNH 83
Figure 40 – Selisih CNY dengan CNH, Agustus 2010-Januari 2016 83
Figure 41 – Selisih tajam antara CNY dan CNH berdampak pada lonjakan bunga antar-bank di bulan Januari 2016 84
Figure 42 – Intervensi pasar CNH bisa menyesuaikan bunga CNH dengan CNY, 20151110-20160126 85
Figure 43 – Pasar deposit CNH, Maret 2009 – Des. 2015 86
Figure 44 – Distribusi CNH menurut bank sentral (offshore yuan’s swap line), Nov. 2015 88
Figure 45 – Penyelesaian perdagangan dalam CNH, 2009Q3-2015Q4 89
Figure 46 – Pasar deposit CNH menurut negara, 2014 89
Figure 47 – Beberapa alternatif indikator pertumbuhan ekonomi Cina mengacu pada penurunan yang lebih besar (greater slowdown), 2010–2015 95
Figure 48 – Indeks Saham Gabungan Shanghai (SCI), Mei 2015 sampai 5 Februari 2016 97
Figure 49 – Indeks Saham Gabungan Shanghai, 1 Januari 2015 – 8 Maret 2016 98
Figure 50 – Triple policy trilemma 99
Figure 51 – Pasar obligasi Cina, 2003-2014 104
Figure 52 – Aktivitas perdagangan pasar sekunder obligasi Cina, 2000-2014 104
Figure 53 – Pangsa pasar obligasi Cina menurut jenis obligasi, Des. 2014 104
Figure 54 – Daftar emisi obligasi Panda, 20151010-20160121 106
Figure 55 – Emisi obligasi CNY, 2008-2015 111
Figure 56 – Emisi obligasi CNH, 2008-2015 111
Figure 57 – Asset backed securities di Cina, 2005-2014 112
Figure 58 – Peristiwa bersejarah dan harga minyak mentah, 1861-2014 (US$/b) 121
Figure 59 – Harga minyak mentah Brent (US$), 20040102-20160106 123
Figure 60 – Kelebihan pasokan minyak mentah dunia, 2012q3-2015q3 123
Figure 61 – Distribusi ladang produksi minyak shale AS, April 2015 124
Figure 62 – Suku bunga deposito dan pembiayaan ulang ECB, 2008-Maret 2016 127
Figure 63 – Prediksi nilai tengah suku bunga Federal Funds, Des. 2015-2019 127
Figure 64 – Federal funds target rata (%), 1983-2015 128
Figure 65 – Federal funds rate, 1 Juli 1954-18 Feb. 2016 128
Figure 66 – Skema sumber pendanaan perusahaan 130
Figure 67 – Factors adding to reserves and off balance sheet securities lending program 137
Figure 68 – Multiplikasi Penciptaan Aset Fiktif 143
Figure 69 – Klasifikasi struktur aset, struktur finansil, dan struktur kapital 161


http://www.economist.com/news/business-and-finance/21685146-chinas-stocks-and-currency-start-2016-big-tumbles-chinas-stockmarket
Open the door to green
China’s stockmarket crashes—again
Jan 4th 2016 | SHANGHAI

China’s stocks and currency start 2016 with big tumbles

ONE of the many oddities of the topsy-turvy world of Chinese finance is that red is green and green is red. In most countries “going into the red” means losing money; stocks that are falling are often depicted in red on ticker boards. In China, however, red is auspicious and so is the colour for stocks that make gains; green is for the losers.
Before trading started on January 4th, the first trading day of 2016, Chinese financial media were full of cheery predictions that the nation’s markets would “open the door to red”—that is, get off to a flying start. But when the door opened, it was a flood of green.

The CSI 300, an index of the country’s biggest stocks, fell by 7%, the worst-ever start to a year for Chinese markets. Small-cap stocks fared even worse, many falling by the daily maximum of 10%. Monday was the first day of operation for new “circuit breakers”—automatic 15-minute pauses in trading whenever the CSI 300 swings up or down by 5%.
These are intended to restore calm when the markets are in a frenzy. No such luck: less than ten minutes after trading resumed following the first such pause, the index fell by another two percentage points. That triggered another circuit breaker, prompting a suspension in trading for the remainder of the day.

China’s currency also glowed green on Monday. It started the year with a 0.6% fall against the dollar, a large move given the many restrictions on trading. The central bank set its daily reference rate below 6.5 yuan to the dollar for the first time since 2011, suggesting that it will tolerate more depreciation in the coming months.
It is certainly under pressure to do so. Local companies are positioning themselves for a weaker yuan, driving the hefty capital outflows of recent months. And the offshore trading rate for the yuan is nearly 2% lower than the onshore rate, implying that investors expect it to keep falling.

It is of course dangerous to read too much into one green-tinted day, especially for a stockmarket as volatile as China’s. Share prices had rebounded after crashing this summer (when trading opened, the CSI 300 was up by more than 20% since August’s nadir) and a fresh correction had seemed inevitable.
Regulators have started to relax the many extraordinary measures they had taken in recent months to prop up the market. Come Friday, the temporary ban on selling for those who own stakes of 5% or more in any company will be lifted. Some of the selling was in anticipation of that. The new circuit breakers, far from calming investors, may have exacerbated the sense of panic.
The economy also appears to be on much the same path as last year: surveys published so far in January have shown weakness in manufacturing but strong growth in the services sector.

Nevertheless, it is surely not the kind of start to 2016 that Chinese authorities were hoping to see from their financial markets. They have consistently claimed that their stockmarket rescue was only meant to be temporary. Yet if the sell-off continues, it would not be surprising to see them wade in once again.
As for the yuan, the central bank has signalled that it is willing to see depreciation, at least against the dollar. Its resolve may now be tested: sustained depreciation against the greenback is likely to fuel yet more capital outflows and deal another blow to economic confidence, which is already fragile. There is at least one English metaphor that suits the colour-coding of China’s markets: they are looking a little green around the gills.

http://www.fortune.com/2016/01/07/china-stock-market-crash-2/
Why China’s Stock Market Crash Could Spark a Trade War
by Chris Matthews, January 7, 2016, 5:22 PM EST
@crobmatthews

A cheaper renminbi will cause ripples in the global economy.

For the second day in one week, China’s regulators shut down trading on its stock markets after sharp declines triggered automatic “circuit breakers” aimed at promoting financial stability in the country.

The reasons for China’s stock market troubles are many, but most analysts pointed to a move by the central bank to weaken China’s currency—the renminbi—as the primary cause for the decline. As my colleague Scott Cendrowski wrote Thursday, “China’s central bank lowered the yuan’s so-called reference rate, its trading peg to the U.S. dollar, by the largest margin since August, when the yuan dropped a couple percentage points over two days. That created a fear that China’s leaders are using a weaker currency to spark growth for an economy that is struggling more than expected.”

China’s management of its currency has been fascination for American observers for decades, as economists have long suspected that China undervalued its currency in order to subsidize its manufacturing and export industry. But those fears subsided in recent years, as the Chinese government allowed its currency to appreciate as part of a broader effort to rebalance its economy away from relying on investment and exports to one reliant more on domestic consumption.

But the sharp slowdown in the Chinese economy this year, paired with big losses in its equity markets, has thrown that analysis into question. And the fact that China’s currency is falling now is a sign that the transition the economy was supposed to be making towards the consumer is in trouble.

Earlier this year, China allowed its currency, the renminbi, to trade within a wider band around the value of the dollar, to which its value is pegged. But instead of rising in value, the renminbi fell against the dollar, and on Thursday the Chinese government allowed (or forced, depending on whom you ask) its currency to go down again, to its lowest value against the dollar in five years.

For some, this smacks of rank currency wars, with China fighting its quickly weakening economy with a cheaper currency to boost exports. Others argue that with the dollar stronger today than it has been in decades, it only makes sense to allow the yuan to weaken in response to this.

But wherever you come down on China’s motivations for its devaluation, it’s clear that a cheaper renminbi will send ripple effects through the global economy. And that’s likely why stocks in the U.S. and elsewhere plunged on Thursday.

The biggest fear is a deepening of a trade war that is being fought between the world’s economies over a very limited supply of global demand. One of China’s main competitors in the region, Vietnam, has moved three separate times this year to devalue its currency, with the last coming in August.
“The policy action today is positive in its promptness in response to China’s devaluation,” Eugenia Fabon Victorino and Irene Cheung, analysts at Australia & New Zealand Banking Group Ltd., said in a research note at the time.

Meanwhile, other big exporters like Japan and Korea, have been watching the moves in the renminbi closely. Korea’s won hit a three year low earlier this year, while the Japanese central bank has been engaged in massive monetary stimulus in recent years. The Japanese government argues that this is purely to stimulate domestic demand, but
economists like Robert Scott of the Economic Policy Institute have argued that Japan’s tactics are different than, for instance, the Federal Reserve’s quantitative easing, and that currency manipulation on the part of Japan has cost the U.S. hundreds of thousands of jobs per year.

As economist and China expert Michael Pettis has argued, what China’s troubles today underscore is the dearth of demand in the global economy. There are virtually no economies on earth today that are growing quickly as the result of rising incomes.
Instead China’s rapid growth, until recently, has mostly been the product of a government policy that encourages excessive investment and keeps wages low in order to boost exports and employment. The few large economies that run trade deficits, though, like the United States and the U.K., don’t have the capacity to buy everything that China and the rest of the world’s exporters are trying to sell.

And therefore, it’s likely we’ll continue to see exporters fighting for every scrap of slow growing demand. Only time will tell whether China can ween itself off its dependency on exports. But what is certain is that the longer China waits to make the necessary reforms, the less stable the world’s second largest economy will be in the long run.

China’s regulators shut down trading on its stock markets http://fortune.com/2016/01/07/chinas-trading-day-only-lasted-29-minutes/
wrote Thursday, http://fortune.com/2016/01/07/chinas-trading-day-only-lasted-29-minutes/
said in a research note at the time http://www.bloomberg.com/news/articles/2015-08-19/vietnam-s-central-bank-devalues-dong-for-third-time-this-year
have argued http://www.epi.org/publication/currency-manipulation-and-the-896600-u-s-jobs-lost-due-to-the-u-s-japan-trade-deficit/
has argued http://press.princeton.edu/titles/9936.html
Is China Trying to Hide Capital Outflows? http://fortune.com/2016/02/19/is-china-trying-to-hide-capital-outflows/?iid=rightrail-more

http://www.forbes.com/sites/kennethkim/2016/01/18/whats-going-on-with-chinas-stock-markets-and-economy/#20a40a7d5d22
What’s Going On With China’s Stock Markets And Economy?
Kenneth Kim , Jan 18, 2016 @ 01:02 PM 52,290 views

I’ve spent the past few weeks in China. Perhaps most noteworthy, I was in China when its stock markets closed trading early when its circuit breakers triggered. And, as we all know and witnessed, as China’s market valuations were precipitously dropping, many of the world’s markets followed suit. What’s going on, what’s going to happen, and what should we do?
To find the answers to these questions, I spent every day these past two weeks reading the local Chinese news and also the news from abroad, studying the daily releases of Chinese economic reports, talking to local journalists (both print and television) in China, and talking to high level corporate executives in China. I combined all of this new information with the knowledge that I already had on China. Here are my answers.

First, what happened? Why did China’s stock markets experience a free-fall during the first week of trading in 2016? The Chinese regulators erred. They installed market-wide circuit breakers into their stock markets. The way a circuit breaker works is that it shuts down and closes the trading day if the market is down by a specific percent. Installing circuit breakers into the Chinese markets was a big mistake.
This is not just 20-20 hindsight on my part. I’ve spent a majority of my academic career studying and criticising these kinds of market mechanisms to control volatility artificially. It was this research, in large part, that led to my past appointments with the U.S. Securities and Exchange Commission and with the Kuala Lumpur Stock Exchange.
Sure, we use circuit breakers in the New York Stock Exchange, but that’s also controversial. In China, its stock markets already use daily price limits (in China, individual stock prices cannot fall by more than 10% per day), and its marginal investors seem to be the uninformed, speculative, individual investors (a marginal investor is the one that has the power to affect market prices).
So, the imposition of circuit breakers was not only repetitive to its price limit system, but it also only served to incite panic rather than to reduce it. Think about it. China is a place where there isn’t a whole lot of transparency to begin with. So, if I’m a somewhat clueless individual investor in China, and one day I see that Chinese regulators suddenly install circuit breakers in fear of a market crash, then naturally I’m going to panic. And this is what happened.
The Chinese regulators now see it this way too, which is why they recently removed the circuit breakers. On one hand, this is all comical, but on the other hand, it’s extremely frustrating. Now, let me address what some people think is true, but is really NOT true.

Some economic data or news justified the Chinese market collapse. This is not true. I tried to look at every piece of economic news that was announced or released during the first week of this year’s trading in China, and there was nothing that should have justified China’s market free-fall. I read the many international news stories that tried to pin the blame on some economic news, but every explanation that was offered was neither convincing nor plausible.
You might think that this is not possible, that every stock market crash has an economic-based rationale or cause, but consider that there is no consensus economic rationale behind the 1987 U.S. stock market crash. So, “causeless crashes” are not unprecedented; it even happened in the U.S.

The Chinese government is intentionally pushing down its stock market valuations to prevent a bubble or to reduce the value of its currency. Not only is this not true, but it’s also ludicrous. The Chinese government and regulators have been doing everything they can to prevent the stock markets from falling.

China is going into a recession. I highly doubt this. Sure, the estimated Chinese GDP growth rates of about 7% in 2015, and forecasted to about 6-7% for 2016, are kind of hard to believe, but even the most skeptical economists in China still believe its GDP growth rate will be about 3% in 2016.
A 3% growth rate is not great, but it’s still positive growth and beats what the U.S. has been doing lately. And a 3% GDP growth rate certainly does not put China into recession territory, especially for an economy that has already grown a lot recently.

its circuit breakers triggered http://www.bloomberg.com/news/articles/2016-01-07/chinese-stocks-trigger-trading-halt-after-csi-300-declines-5-
world’s markets followed suit http://www.wsj.com/articles/global-stocks-fall-on-china-volatility-1452156855

http://www.forbes.com/sites/kennethkim/2016/01/18/whats-going-on-with-chinas-stock-markets-and-economy/2/#49daed105539
What’s Going On With China’s Stock Markets And Economy?
Kenneth Kim, Jan 18, 2016 @ 01:02 PM 52,292 views

U.S. markets heavily depend on China’s economy. Again, not true. The amount of sales that the U.S. has in China represent a very small portion of our GDP. If you don’t believe me, then consider this… the U.S. has been complaining about its trade imbalance with China for many, many years. And if it is true, that our economy depends on theirs, then we should be happy that their currency is depreciating, as it should help their economy.
The U.S. stock market simply overreacted to China’s market free-fall. We have a history of doing this. Remember when we irrationally panicked over Greece, even though the size of Greece’s economy and international trade are miniscule within the context of the global economy?

Chinese banks are going to collapse. It is true that Chinese banks suffer from significant problems such as shadow banking. However, the Chinese government is so paranoid about this problem that I doubt it will lead to a banking collapse. The Chinese government has the U.S. to thank for this, because they saw what not-to-do as they watched us let our financial institutions and financial system crumble in 2008.

So, what is true? Much of what I’m going to tell you here is based on my experience and accumulated knowledge and insights while in China. I moved to China in 2011, and I have been living and working in Beijing and Shanghai, mostly as a finance professor. As a researcher on China’s economy and financial markets, and also as frequent television commentator, I’ve become something of a notable economist here.

Chinese are not consuming. The Chinese government realizes that it cannot rely on exporting forever for its country’s income and wealth, so they are trying to shift the country to move toward a greater reliance on consumption to boost their GDP. But it is simply not happening, at least not amongst the rising middle-class. This is one reason why the economy is not growing as well as it has in the past.

China curtailing its investment rates is somewhat intentional. Many outsiders worry about China’s slowing investment growth. However, the government does not encourage investment growth for the sake of growth. This is good news. So, while declining investment rates are sort of a cause of concern, it should not be a cause of major concern.

China wants to weaken its currency, the RMB, for now. While China is trying to find other sources of economic growth, it seems like they will keep reverting back to a reliance on exporting as they figure it out what else to do and what else will work. And a way to export successfully is to make its currency weak. This isn’t all bad.
A weak Chinese RMB means China’s economy will stay healthy, which is something that everyone wants, including the U.S., but, a weak RMB also means lower U.S. export sales in China and potential for a currency war. That is, a weak Chinese currency imposes both costs and benefits on the U.S.
The way the conflict will eventually shake out is uncertain, especially because the benefits of a weak Chinese currency to the U.S. is primarily indirect.

The Chinese economy will grow. It is not a matter of if, but when, China will become the world’s largest economy. There are lots of people who criticize China’s economic policies, but consider that its transition to a market-based economy is still very much at its beginning stages. In context, China is truly remarkable in its ability to learn and in its ability to adjust quickly.
My estimate is that during the next 20 years, China will contribute at least a half billion additional people to the global middle class, which is both the engine and benefit of economic growth.

shadow banking http://www.huffingtonpost.com/otaviano-canuto/shadow-banking-in-china-a_b_8591706.html
so paranoid http://www.bloomberg.com/news/articles/2015-08-07/china-s-stock-crash-is-spurring-a-shakeout-in-its-shadow-banks

http://www.forbes.com/sites/kennethkim/2016/01/18/whats-going-on-with-chinas-stock-markets-and-economy/3/#213c81327ea1
What’s Going On With China’s Stock Markets And Economy?
Kenneth Kim, Jan 18, 2016 @ 01:02 PM 52,293 views

The Chinese stock market’s valuations is meaningless. As I have written before, so long as China’s accounting transparency and corporate governance are weak, we shouldn’t read too much into their stock market valuations and into its rises and falls. This is why I am often frustrated when the world takes cues from Chinese market fluctuations, as if it means anything, when in reality it means very little.
Remember, the marginal investors (these are the investors that can affect stock prices) in China are uninformed, speculative, individual investors. So, what can investors do? I suppose this the most important question to many people, especially investors. I’ve written on this as well.

accounting transparency http://www.forbes.com/sites/kennethkim/2015/10/01/chinese-stock-markets-do-not-matter/#2715e4857a0b6ab2e7f250df
corporate governance http://www.forbes.com/sites/kennethkim/2015/12/12/investing-in-china-8-things-thatll-cause-you-misery/#2715e4857a0b1ff381115c6d
I’ve written on this as well. http://www.forbes.com/sites/kennethkim/2016/01/14/what-investors-can-do-when-markets-are-volatile/?utm_source=followingimmediate&utm_medium=email&utm_campaign=20160114#2715e4857a0b1f925f173db2

https://hbr.org/2016/01/why-chinas-market-crash-is-so-unsurprising
Why China’s Market Crash Is So Unsurprising
Linda Yueh, January 12, 2016

Another slump in Chinese markets has led to global market turmoil. We should get used to it.

One of my {predictions for 2016}was that we should expect further Chinese market volatility after last summer’s market crash. I have {written before}about how the unusual nature of China’s stock markets, which are dominated by small investors and are largely closed to foreigners, makes them prone to volatile behavior.

The latest market slump has highlighted how difficult it is for policy makers to manage volatility in a transition economy where the stock market is still being reformed.

Last week the Chinese authorities tried to limit the fall of the market through the use of so-called circuit breakers. But halting the trading of shares for 15 minutes wasn’t reassuring to investors —especially retail ones, who saw it as preventing them from getting out of the market — so trading was suspended entirely on Monday and Thursday as well. After these failed attempts to halt the decline, the authorities suspended the use of additional circuit breakers.

But the unusual structure of the equities market remains unchanged. Chinese stocks remain prone to large swings in valuations. The stock market was down by nearly half in the first half of last year, which was when the big August sell-off caused global ripples. Then, by autumn, the market was up more than 20%, so it had swung into bull market territory in a matter of months. Now, in the first week of trading in 2016, it is again falling and will likely remain volatile over the next few months.

Notably, just as in other financial markets, retail investors tend to act in “herds,” where if someone pulls money out to take some profit from the bull market, others will follow, believing that the early movers have better information. And it’s worse in China because, unlike in developed country markets, information is less than transparent and the dominance of state firms means the books are not always easy to check.

The Chinese stock market has regularly exhibited such “roller coaster” behavior throughout its two-and-a-half-decade history. The difference now is that China is the world’s second-largest economy, and its market gyrations are monitored by global investors in companies that depend on selling to China. Indeed, the FTSE All-World Index fell 6.1% last week, which is the worst five-day run since that measure of global stocks was established two decades ago.

Importantly, the underlying concern about the health of the Chinese economy also hasn’t changed in the six months or so since the last market crash. Economic reforms take time, and the latest indications are that the economy continues to slow. Making the {country’s growth model}less breakneck, supported instead by innovation, is no simple task. And Chinese policy makers’ largely ineffective efforts to manage the financial markets aren’t exactly inspiring confidence.

In other words, reforming an economy of such scale as China’s is a tough task. It will require policy makers to adopt transparent and effective policies to fine-tune the economy, which will be a sea change from the diktats and administrative measures that have largely characterized policy making in the transition economy thus far. For instance, to shore up the market, rather than banning large companies from selling shares, policy makers could use taxes to deter excessive trading.

It’ll be a while before China can manage to find the right set of tools for its transition markets and convince investors that policy makers can manage difficult structural reforms of its economy. Understandably, the stock market isn’t developed enough to expect market-based tools, such as imposing transaction costs, to have the same effect as in developed markets.

But repeated failures in regulating the stock market won’t win back the confidence of either domestic or global investors. Failed policies, like the latest circuit breakers and the previous administrative interventions, instead compound the concerns around the health of the Chinese economy.So we should continue to expect volatility in Chinese markets for a while.

predictions for 2016 http://www.lindayueh.com/Documents/LBSR_WIN_32-35_China%20v%20USA%20v5.pdf
written before http://www.project-syndicate.org/commentary/china-stock-market-crash-by-linda-yueh-2015-07
country’s growth model https://hbr.org/2015/12/chinas-growth-a-brief-history

http://www.business-standard.com/article/international/china-removes-csrc-head-after-market-crash-116022000710_1.html
China removes CSRC head after market crash
Bloomberg February 20, 2016 Last Updated at 21:12 IST
It was on Xiao’s watch that unchecked leverage drove a jump in equities from late 2014 before a collapse in June 2015

The head of China’s securities regulator has been removed from his post after last year’s $5-trillion stock market bust, an unprecedented government rescue and a renewed crisis as plunging Chinese equities last month reverberated around the world.

Xiao Gang, 57, a former head of Bank of China, had been chairman of the China Securities Regulatory Commission since March 2013. His exit was announced Saturday by state-owned Xinhua News Agency, which cited a State Council statement. Xiao’s replacement is Liu Shiyu, who previously served as chairman of Agricultural Bank of China.

It was on Xiao’s watch that unchecked leverage drove a jump in equities from late 2014 before a collapse in June last year that triggered government stock purchases, restrictions on stake sales and a temporary ban on initial public offerings. In an about-face, the CSRC in January scrapped circuit breakers within four days of their introduction as they deepened rather than stabilized the market.

“Somebody needed to bear responsibility after the suspension of the circuit-breaker system,” Zheng Chunming, a Shanghai-based analyst at Capital Securities, said before the announcement. Xiao’s exit is to show investors that the government is concerned about their losses, Zheng said.

China’s Premier Li Keqiang earlier this week became the the most senior official to fault regulators’ reaction to the market turmoil, saying at a State Council meeting that they didn’t respond actively to declines. Li didn’t specify which regulators, and defended the decision to intervene in markets as necessary to head off systemic risks, according to a Beijing News report carried on the government’s website.

“The worst thing the CSRC has done is to rescue the market at all costs without thinking about the consequences,” said Liu Shengjun, deputy director of the CEIBS Lujiazui Institute of International Finance in Shanghai. “The market rescue is the biggest setback for China’s stock market in its 25 years of history. The market system is moving backward.”

During Xiao’s stint at the helm, another senior CSRC official was one of those caught up in probes across the finance industry by the Communist Party’s anti-graft investigators. Yao Gang, a vice-chairman at the regulator, was targeted in November for “alleged serious disciplinary violations,” language often used for corruption probes. No comment has been available from Yao.

http://www.mashable.com/2016/01/09/china-stock-market-you/#HeHb9xuLvmqK
China’s stock market crash matters to all of us
By Jason Abbruzzese, Jan 09, 2016

We’re only a week into 2016 and China is already producing some serious “sky is falling” headlines. And, yeah, you should care. Sure, you probably don’t own many Chinese stocks, so something like two crashes in three days hasn’t made you any poorer. Maybe you’re not terribly active in the foreign currency exchange markets either, so no harm there.

But those crashes do hint at a very scary situation in China that could easily end up impacting the global economy — including the U.S. of A. Let’s start with the news.

Crash and crash again

So far, China’s stock market has only been able to make it through one of its three trading days without crashing. On Thursday, it lasted a whole 15 minutes before a 7% plunge forced it to shutdown for the day. That has wrecked havoc on global markets, sending the Dow Jones Industrial Average down 5% already this year. Have any retirement savings? Yea, you just lost money.

Don’t feel too bad, as you’re definitely not alone. Just about every single major stock market around the world has started the year like that. So at least we’re all poor together. But who cares? Retirement is a ways off, right? Well, here’s why you should also care in the short term.

China and the global economy

China occupies a special place in the global economy. It’s the world’s largest trading partner. Its growing middle and upper classes have become major consumers of the world’s goods. Its manufacturing industry provides the demand for the raw materials produced by emerging economies, countries like India, Indonesia, Malaysia, Mexico and many others that are industrializing quickly.

Kamran Dadkhah, associate professor of economics at Northeastern University, said that these connections mean China’s problems are now everybody’s problems. “It matters to everybody for one simple reason — that it is a connected world. It is a globalized world,” he said. In the past couple decades, the country has experienced meteoric growth that is best shown by the Pudong area of Shanghai, a financial district that has sprung up from basically nothing.

That being said, China is still going through a difficult transition from socialism to capitalism, meaning its government that once tightly controlled the economy is slowly letting the global market take the wheel. That’s a tough process, particularly for a government that is used to being able to turn the economic knobs as it pleases. It still likes to do so from time to time, as it did on Thursday — a currency move that will get to in a bit.

But to show how precarious things are, a relatively small tweak sent investors into a pretty steep nose dive. And when China dives, so does everybody else, as evidenced by the market declines around the world. Dadkhah warned not too put too much faith in the markets, however, noting that they are responding more to uncertainty than anything else.

“A good deal of this is because of uncertainty. It’s not because people actually know something has gone wrong,” he said.

Made in China

Chances are, if you’ve ever bought something and wondered why it seemed to cost half as much as everything else, there’s a “Made in China” label somewhere on it. That’s because China’s massive population provided a ton of cheap labor to make stuff. Hence, the country become a massive importer of raw materials and an equally massive exporter of stuff made from those materials.

Now, as the world’s largest exporter, it’s also the leading trade partner for a lot of emerging economies that rely on China to buy raw materials. This leaves them highly susceptible to fluctuations in China’s economy, especially on the manufacturing side. And oh by the way, data showing that China’s manufacturing industry is shrinking led to the year’s first crash.

That’s bad news if you live in an emerging economy, but also for just about everybody else. Emerging economies have a surprising amount of purchasing power and fuel almost 80% of global economic growth. If you’re hoping things improve globally, you have to be hoping that emerging economies do well.

This means war

There’s another fear that’s a bit wonkier, but on some level even scarier: Currency war. One of the biggest ways that China controls its economy is through tight management of the yuan — its equivalent to the dollar. That can be risky, especially when people get skittish about what the government might do next.

A quick primer: most countries allow their currencies to trade freely on foreign exchange (FX) markets. A country’s currency can fluctuate in value just like any other asset, often affected by the amount of goods it sells in comparison to how much it buys (among other things).

China, however, doesn’t do this. Its government tightly controls the yuan’s exchange rate. It has done this for decades, even as the country has grown into a global market player. China had purposefully kept the yuan cheap compared to other currencies until relatively recently. Doing this has meant that Chinese goods remain cheap and in high demand.

Controlling the value of the yuan has become one of the Chinese government’s go-to ways to boost its economy. It’s also a go-to way to piss off the rest of the world. When China devalues its currency, every other country feels it. Imports from China suddenly become cheaper and their exports become more expensive. Put another way, their products become less competitive on the market than China’s.

China did just that on Thursday, dropping the value of the yuan by 0.5%. The concern is that if China does this again, other countries could move to also devalue their currency to prevent China from gaining to great of an advantage. This is known as a currency war, and it can wreak havoc on economies — particularly those of emerging markets. That can hurt the U.S., but thanks to a strong economy, only so much.

A bear, a long time coming

The global economic situation is still scary, but its not the only reason there’s concern about where the U.S. stock market is headed. Market analysts typically see cycles in the markets that are known as “bull” and “bear” markets. A bull market means an upward trend; a bear market means a downward trend.

The U.S. has been in a bull market for quite a while, starting with the beginning of the recovery from the financial crisis. As bank UBS noted recently, that has carried on for 81 month, a relatively long stretch that has yielded a strong climb in prices.

The concern now is that we have begun to head into a bear market that has been long overdue. And it’s not just one bank that’s turning bearish — it’s everybody. As financial adviser Josh Brown noted on his popular finance blog, The Reformed Broker, “I read technical notes from all over The Street and from among my friends in the financial blogosphere every week. I can’t remember the last time I read a bullish one.”

world’s largest trading partner http://www.bloomberg.com/news/articles/2013-02-09/china-passes-u-s-to-become-the-world-s-biggest-trading-nation
80% of global economic growth http://www.imf.org/external/pubs/ft/survey/so/2016/INT010416A.htm
emerging markets http://www.cnbc.com/2015/08/21/why-emerging-market-currencies-are-collapsing.html
UBS noted recently http://thereformedbroker.com/2016/01/06/the-global-bear-market-has-already-begun-ubs/?utm_source=dlvr.it&utm_medium=twitter

http://www.economonitor.com/blog/2015/11/chinas-stock-market-crash-part-1-communist-shares/
China’s Stock Market Crash: Part 1 – Communist Shares
By Satyajit Das on November 11, 2015

Most things in China are unfamiliar to foreigners, even its stock market. This is the first part of a three part series on the Chinese stock market crash. Between 2013 and mid-2015, the Shanghai Stock Exchange Composite Index rose by around 250% from around 2,000 to over 5,000. Other Chinese indices, especially the Shenzhen Stock Exchange and the ChiNext index, dominated by smaller and technology shares, also rose sharply.

Since reaching its peak in June 2015, the indexes have fallen sharply, by around 30%. The loss equates to around US$3-4 trillion dollars. The phenomenon is hardly new, with similar episodes in 2001 and 2007/ 2008. In the later, the benchmark Shanghai Composite index also topped 5,000, a rise of 90% followed by a fall of 70%.

Socialist Stocks

There is an obvious contradiction between private property, stock markets and socialism. Mao Zedong famously used the term “capitalist roaders” to castigate Communist Party members who favoured market driven economics. Chinese stock markets are complex, involving multiple types of shares and convoluted ownership arrangements.

There are A-shares: Renminbi denominated shares in mainland China-based companies whose ownership is restricted to mainland citizens and foreigners under the regulated Qualified Foreign Institutional Investor (QFII) system. There are B-shares which are quoted in foreign currencies (such as the US dollar) and can be purchased by domestic and foreign investors (with a foreign currency account). There are H-shares: Hong Kong dollars denominated shares in Chinese companies which are listed in and trade on the Hong Kong Stock Exchange.

There are even shares which are not really shares, such as the rights in Variable Interest Entity used by foreigners to get around ownership prohibitions to acquire stakes in Chinese Internet companies like Alibaba. These are typically Cayman Islands companies which use contracts to provide an economic interest in a Chinese business.
In the case of Alibaba, its Chinese assets are owned by founder Jack Ma and other related parties. The Cayman Islands Company has contractual rights to the profits of Alibaba China. Such rights may be deemed illegal by Chinese authorities or be unenforceable. It is also difficult to protect the business assets and earnings from actions by the legal owners.

The stock market itself is relatively unimportant within the Chinese system. Equity issues contribute 5-10% of all capital raisings. The vast majority of funding is in the form debt, primarily from banks. The stock market is small relative to the size of the economy. Historically, the total free float value (shares available for trading) in China is around 25-35% of Gross Domestic Product, well below the levels in the US (150%) and most developed economies (85-100%).

Retail investment is modest with only around 10-20% of household wealth being held in the form of shares, well below levels in developed countries. Less than 10% of Chinese households actively trade shares while another 4% are exposed to the stock market through mutual funds. Chinese stock markets are also different.

Around 30% of the value of the Shanghai market is made up of large companies. Main are government related, where a large proportion of shares are held by state firms and government agencies. The rest of market is made up of numerous small and medium sized enterprises. It is these small and medium capitalisation stocks which attract many investors. The recent stock rises were mainly in these smaller stocks which increased by 100-400%. In contrast, the prices of larger mainland companies rose by a more modest 20-30% during the corresponding period.

The investment environment is also different. Regulation is poor, with many companies listing on Chinese exchanges where they would be unable to meet the more stringent requirements of overseas exchanges, such as Hong Kong or the US. Information sources are frequently unsatisfactory. As is well documented, Chinese macroeconomic data is unreliable. Company specific financial disclosure, dividend payments, audits, governance and protection of shareholder rights are poor. Unanticipated government intervention to achieve policy objectives is not unusual.

President Xi’s Boom

China’ recent run-up in share prices has many drivers. In an interesting reversal to the experience in developed economies, the performance of the Chinese stock market has not until the recent boom matched its stellar economic growth. In the past 20-25 years, investors have earned a modest 1-2% per annum.
In the 20 years commencing June 1993, the Chinese stock market rose around 20% until the recent sharp increase, compared to gains of around 400-500% in the S&P 500 and over 300% in emerging markets. The Shanghai market was until recently valued at around 6-8 times earnings, well below the 12-15 times of international markets. Investors, especially international fund managers, saw the market as undervalued.

But the primary factor behind the boom was government policy. Investors invested believing that the government would ensure that shares prices would keep rising. The A-share bubble was engineered to compensate for the China’s growing economic problems which threatened this tacit arrangement.

China’s economic growth has slowed. It is now forecast to be around 7%, well below the nearly 12% growth it averaged between 2002 and 2008 and 8-9% since 2008. The 7% growth in 2015 would have been around 5.5-6% except for fall in import prices and a fall in inflation. Nominal growth is sluggish.

The real estate market, which was a significant source of increasing wealth, is no longer booming. Prices are down around 20-30%. The government has restricted wealth management products offered by China’s shadow banking system, limited higher returning investment opportunities for investors looking to protect their purchasing power.

The government undertook targeted easing of interest rates and loosening restrictions on lending to boost growth as well as help manage the reduction of shadow banking and slowdown in the property sector. Lower rates helped fuel the rise in stock.

Higher shares prices were also intended to assist heavily indebted property companies, local government financing vehicles and state owned businesses. Favourable stock markets would enable these businesses to raise equity to pay back bank borrowings. Taking advantage of conditions, Chinese companies have raised around US$100 billion in initial and secondary stock offerings.

The development of equity markets was part of a broader reform agenda. It was intended to rebalance the financial system from its excessive reliance of bank loans and create a dynamic stock market to finance future growth. As part of this agenda, policy makers encouraging the creation of exchanges to become a funding source for start-ups and innovative companies.

The state-controlled news media supported the policy, publishing favourable pieces on the prospects of the technology and Internet sector. In a sop to international pressure regarding deregulation, China also increased the limit for foreign funds investment to US$150 billion (from $80 billion). It also established a trading link between the Shanghai and Hong Kong exchanges to allow foreigners greater access to Chinese stocks.

Chinese policy makers, historically, have played an important role in directing savings into specific assets classes or investments as part of their management of the economy. The engineered stock market rise was a continuation of that process. The process quickly spun out of control. It was as an old Chinese proverb states akin to “drinking poison to quench one’s thirst”.

http://www.economonitor.com/blog/2015/11/chinas-stock-market-crash-part-2-a-little-capitalist-problem/
China’s Stock Market Crash: Part 2 – A Little Capitalist Problem
By Satyajit Das on November 18, 2015

Most things in China are unfamiliar to foreigners, even its stock market. This is the second part of a three part series on the Chinese stock market crash. The Chinese government’s policy to boost stock prices succeeded beyond expectations as investors fuelled a speculative boom. Prices rose around 250% in around 2 years, including a rise of 26% in a single month.

Daily turnover quadrupled. At one stage, over 500,000 new trading accounts were being opened weekly. The Chinese stock market increased in size rapidly, overtaking Japan to become the second largest stock market in the world. There were a number of factors behind the rise. Greater access saw increased international participation, particularly from Hong Kong.

Overseas investors searched for the next Alibaba, drawn by the prospects of very large gains when that company listed in the US. Technical factors played a part. ChiNext, a market for start-ups, more than tripled in the period after mid-2014 because of an anomaly. Regulators responsible for approving initial public offering were unable to keep up with the rise in businesses seeking to list.

To get around this problem, already listed firms operated as listing or financing vehicles. Investors drove their prices up, using the shares as currency to buy businesses awaiting listing. One flooring company reinvented itself as an online-gaming business. A pyrotechnic firm mutated into a peer-to-peer lending business.

As result, the prices on ChiNext reached around 150 times earnings, comparable to the NASDAQ at the height of the internet boom. Retail investors played a major role in the rise of share prices. In the reverse of the position in developed equity markets, Chinese retail investors rather than institutions dominate turnover, accounting for up to 90% of daily trading.

There are probably over 100 million share trading accounts (around 8% of the total population) which compares favourably to the 88 million members of its Communist Party. The penetration of and access to the internet and mobile telephony has assisted the growth of stock trading. The average investor is middle to low income, with over 60% lacking a high school diploma.

Retirees, farmers, office workers, housewives and students feature prominently. Much of the trading is speculative, driven by the lure of seemingly easy money. A high percentage of activity is short term in orientation, with very high levels of intra-day activity. At the height of the boom, trading activity on Chinese exchanges exceeded that of the rest of world’s stock markets.

Corrective Discipline

In June 2015, prices corrected. There is no clear single factor that appears to have triggered the price falls. The market simply ran out of momentum and investors lost confidence. The market had become increasingly driven by debt fuelled liquidity and manic speculation. Valuations had become stretched with the rise in share prices at odds with slowing economic growth and deterioration in corporate earnings.

New initial public offerings were oversubscribed, in some case by 240 times the shares on offer. Purchasing new listings increasingly required investors to sell existing investments, creating selling pressure. The effect of falling prices was amplified by the leverage, in the form of margin loans. The government in conjunction with Chinese exchanges established China Securities Finance Corporation in 2011. It is a state controlled body that lends to securities brokerages to support their margin lending to stock investors.

At its peak, margin loans reached around US$350 billion, around 12-14% of the size of the stock market. In comparison, the level of margin loans in the US is around 5-6% and 1% in Japan. Falling prices triggered margin calls. There was forced liquidation of positions as investors needed to raise cash or could not meet demands for additional collateral.

All Hands To The Pump

As the market fell with increasing rapidity and price changes became disorderly, Chinese authorities responded with a mixture of communist propaganda and borrowed capitalist tricks. Chinese media blamed short sellers and market manipulators. Patriotic calls sought to discourage investors betting on price falls. Chinese police instigated ritual investigations into short selling to scare even legitimate sellers out of positions.

Following the emergency plunge protection guidelines patented by the US authorities, the Chinese central bank pumped money into the financial system. Interest rates were cut. The reserve ratio and loan to deposit limits were altered to allow banks to increase lending. Margin finance rules were relaxed allowing anything from real estate to antiques to be used as collateral for loans.

Given the limited effect of these measures, the government intervened more directly in the market. The government-controlled Securities Association of China arranged for the 21 big brokerage firms to establish a fund worth around US$20 billion, to buy shares in large companies. China’s securities regulator ordered major shareholders (with stakes exceeding 5%), corporate executives, and directors from selling their shares for six months.

State owned enterprises (“SOE”) and investment vehicles were instructed not to sell shares. There were suggestions that some SOE may buy back their own shares to support prices. New listings were deferred. With currently planned share offerings of over US$600 billion, the authorities sought to limit the claims on available investor funds.

The government encouraged companies to apply for trading halts. This resulted in suspension of trading in around 1,400 companies listed on Chinese exchanges, representing over US$$2.5 trillion worth of shares or 40 percent of the stock market capitalization. Eventually, the market stabilised, regaining a part of the fall.

The intervention primarily assisted the share prices of big SOEs, such as PetroChina. The broader market, particularly small-capitalisation stocks, remains fragile. Given the centralised political and economic command and control in China, it is unwise to assume that the authorities cannot prop up share markets.

Large foreign exchange reserves (US$4 trillion) and the ability to use state controlled banks to expand their balance sheets provides the government with significant resources to purchase shares. China’s ability to intervene has constraints. Expansion of credit risks increasing inflationary pressures and also further complicating the task of dealing with a large pre-existing credit bubble.

Intervention might push up the value of the Chinese Yuan, making China’s embattled exporters even less competitive. For the moment, even after the 40% fall, the Chinese market remains above its mid-2014 levels. The outlook is unclear, because of the inability to trade in around half of all listed companies. Chinese authorities are discovering an old capitalist truth – bubbles are hard to see and even harder to catch.

http://www.wsj.com/articles/china-market-plunge-has-investors-wondering-about-more-turmoil-1451919595
Why China’s Market Fell So Much
By Chao Deng, Anjani Trivedi in Hong Kong and Mark Magnier in Beijing
Updated Jan. 5, 2016 4:31 a.m. ET

New circuit breakers kick in, as investors rush to exit amid signs of slowing economy, weaker currency. Asian markets tumbled on the first day of trading in 2016, with declines so steep in China that authorities halted all mainland trading before the end of the day. Photo: EPA

China’s stock market displayed its global heft Monday, as a sharp selloff in Shanghai ushered in a grim opening day for trading world-wide. Fast-trading individual investors dumped shares in China on further evidence that its economy was slowing and that Beijing was weakening the country’s currency.

The decline also appeared to be hastened by expectations that support propping up the market could disappear soon, as well as the debut of new circuit breakers. Most of the factors blamed for the selloff aren’t new; the surprise was China’s impact on the rest of the world. During the market’s crash this past summer, it took weeks of selling in China before other markets reacted, while on Monday, just one bad day in the normally volatile market helped send stocks elsewhere tumbling.

In the U.S., the Dow Jones Industrial Average fell 276.09, or 1.6%, to 17148.9, while the S&P 500 lost 31.28, or 1.5%, 2012.66. “It’s quite an unexpected situation today,” said Leo Gao, Shanghai-based fund manager at hedge fund Greenwoods Asset Management, of how steep the losses were. “It’s more panic selling than anything,” he said.

The Shanghai market fell 6.9% Monday on the first trading day of the year, its worst day since the height of last summer’s market crash. The selloff triggered circuit breakers on their first day in effect, shutting down the market in the early afternoon. People familiar with the matter said early Tuesday that China’s central bank is planning to inject 130 billion yuan ($20 billion) in short-term funds to help calm jittery investors after Monday’s sharp stock selloff.

By deciding to pump the funds into the market, the People’s Bank of China is trying to signal to investors that it hasn’t changed its easing bias, the people said. The Shanghai Composite opened 3% lower on Tuesday but by late morning, the decline had eased to 0.5%. The most obvious factor behind Monday’s selloff was a private index of manufacturing activity in China, which showed that business had slowed for the 10th consecutive month for the country’s steelmakers, shipbuilders and other industries.

The news adds to downbeat data from China, which is expected to disclose this month whether it hit its growth target of about 7% for 2015. That would be the country’s slowest growth in 25 years, and economists say it could set an even-lower target of around 6.5% for 2016. Another worry was China’s falling currency, which crossed a key technical threshold as it hit another nearly five-year low.

The expectation that the yuan will weaken further is one factor causing Chinese to send cash overseas, which itself causes the currency’s decline to deepen. Monday’s decline in the yuan started after China’s central bank guided the currency weaker in the morning, setting the midpoint for the day’s trading range at 6.5032 yuan, its weakest level since 2011. China lets the currency trade 2% above or below that level in its onshore market.

Although the yuan has been weakening steadily for months, traders say they suspect China has been intervening in the markets to slow the decline—something that didn’t appear to happen Monday. “There’s been a lot of surprise in the market that China hasn’t slowed this decline [in the yuan] or come in more aggressively,” said Mitul Kotecha, head of rates and foreign-exchange strategy in Asia at Barclays, referring to efforts to prop up the currency by selling dollars.

Another pressure point on the market Monday: concern that one of the bailout measures imposed by the government during the crash is set to expire on Friday, which could trigger more selling. Under that effort, one of several frantic moves by Beijing to halt the August selling, big shareholders were banned from selling stock for six months. Most analysts expect Beijing to extend the ban if the market keeps falling.

China’s market is dominated by fast-trading individual investors who tend to buy when shares are rising, especially if they believe the government wants the market to go up, and sell when stocks are falling. That appeared to be the case Monday and might have been hastened by the knowledge that the market could shut down if circuit breakers, announced in December, were tripped.

The circuit breakers first kicked in right after the market’s lunch break, shutting down trading for 15 minutes after a 5% drop. But as soon as shares started trading again, the market plummeted, hitting a 7% decline in just a few minutes. Trading was shut for the rest of the day. “The circuit-breaker system actually creates a downward spiral” as more investors get nervous about trying to get out before others, said Hao Hong, managing director at Bank of Communications Co. “Having this so-called system in place is actually making the selling worse.”

When authorities announced the new circuit breaker in December, they said it was meant to help the market “cool off in order to prevent the spread of panic sentiment, which may exacerbate volatility.” On the first trading day of 2016, declines were so steep in China’s stock market that more than 40% of listed companies hit their daily downward limits, and authorities halted trading.

On the first trading day of 2016, declines were so steep in China’s stock market that more than 40% of listed companies hit their daily downward limits, and authorities halted trading. Photo: Agence France-Presse/Getty Images

Monday marked a fresh round of volatility for Chinese markets, which have rebounded by more than 20% from their lows of the summer, when heavy selling eventually spurred volatility around the globe. Over 1,200 stocks on the Shanghai and Shenzhen market, or more than 42% of firms trading, fell by the 10% daily downward limit set by regulators, according to Wind Information.

Market watchers say they aren’t expecting the current fall to develop into a full-fledged repeat of last year’s plunge. A big difference this time is that investors have cut back on borrowing money to buy stocks, or margin loans. During the summer, local investors borrowed money from Chinese brokerages, which drove shares sharply up, and down, as investors sold stakes to repay their brokers.

Since then, official margin loans in China’s mainland market have fallen 49% from a peak of 2.3 trillion yuan in June.

Write to Anjani Trivedi at anjani.trivedi@wsj.com and Mark Magnier at mark.magnier@wsj.com

Corrections & Amplifications:
Margin loans in China have fallen 49% from their peak in June. An earlier version of this article incorrectly said loans have fallen 17%. (Jan. 5)

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