Friday Thoughts on Crazy Nonsense

Friday Thoughts on Crazy Nonsense

1.Caixin and George Chen of the South Morning Post are both reporting that the China Security Finance Corporation is borrowing another 1.4 trillion RMB to prop up the stock market. Now considering they already had access to 3 trillion RMB, it would only make sense that they are requesting additional borrowing because they need more money.  If you are keeping score at home sports fans, that would bring us up to 4.4 trillion RMB in support.

2.I have a piece coming out on FT Alphaville about output in the Chinese economy today which will basically detail why it is probably Chinese growth is near zero. The one thing that I will jump the gun on here is the divergence between official retail sales data and output in consumer products from clothes to electronics.  Garment, footwear, leather, textile, passenger traffic, and consumer electronics output in China are all flat to falling significantly.  Especially in a deflationary price environment, as we are for these categories, how is retail sales growing 10%+ annually?  What are retailers selling if consumer product output is down?  This to me seems a glaring inconsistency because it certainly isn’t coming from a flood of imports.

3.As I have said repeatedly, watch liquidity. The PBOC is shoveling liquidity into the market as fast as possible indicating bank liquidity is in extremely short supply. I haven’t even kept up with the near daily injections 100b RMB.  Watch this, major issue.

4.I have increasingly become convinced that there is a policy divide in Beijing. The PBOC appears resistant to propping up the stock market but is willing to accept injecting liquidity and defending the RMB.  It is interesting to note that most capital to prop up the stock market coming from commercial banks.  This is exposing the banks to enormous risk as this is essentially a type of margin loan but probably without the asset security.  Beijing appears very divided over how much to defend the stock market and even how much to defend the RMB.  Though not large, the RMB fix has been weaker everyday this week.

5.Pay close attention to the 500+ stocks in China that are still frozen. Earlier it was reported virtually all these firms borrowed money with pledged stock near the peak of the market in May and June.  If these reports are true, it is likely that given the length of time these stocks have remained frozen, that these firms would be in technical bankruptcy.  That would be a major blow and cause all kinds of panic so clearly something will be worked out to soften the blow here.  These 500 firms might be the epicenter.

6.Catch me on the BBC World Business Report today at 12:30 Hong Kong time talking about the recent market turmoil in China.