China: When Unbridled Greed Quickly Turns to Naked Fear

History is chock full of examples of government-inflated markets collapsing. It’s ultimately popular greed and fear that drive market cycles! No amount of government jawboning or money printing can strike these overpowering emotions from human hearts. And not even the most-powerful governments can corral herd behavior.

… As is always the case in popular speculative manias, people were far more worried about missing out on the next big upleg than any potential downside risk. So the social-status-conscious and wealth-loving Chinese continued aggressively borrowing to buy stocks… Bullishness and euphoria were universal.

… Chinese investors are starting to realize that neither their government nor central bank is omnipotent, that stock-market cycles can’t be nullified. They are finding out that manipulated stock markets are like a roach motel, you can check in but you can’t check out! While Chinese were encouraged to take their lives’ savings and borrow way beyond that to buy stocks, they aren’t being allowed to sell when they want to.

This is horrifying, and extremely dishonorable on the part of Chinese government and market officials. The surest way to fan the flames of panic is to make investors feel trapped, unable to liquidate any of their positions whenever they want. That breeds the bearish sentiment that drives long declines after popular speculative manias. And as China’s last one in 2007 showed, today’s bust is only getting started. __

Bubble Trap

“Our concern is that a triple bubble in housing, credit and investment comes with the significant risk of a hard landing,” Mr Garthwaite said. __

China’s stock market bubble was supposed to provide relief from the collapsing real estate bubble. But as the stock market bubble collapses, the Chinese are discovering that the real estate bubble remains, and constitutes an even worse problem!

So after decades of [real estate __ ed.] speculation, the gains stopped coming in, and rich and poor investors alike switched to stocks.

But the funny thing about the Chinese is – they don’t put most of their money in stocks. Only about 7% of urban investors own stocks and half of those accounts are under $15,000. In fact, it’s estimated that the Chinese only put 15% of their assets there, and that may be on the high side.

What is so unusual about the Chinese is that they save just over half their income! And the top 10% save over two-thirds!

And where do those savings go? Mostly into real estate!

China’s home ownership rate is 90%. It’s just 64% in the U.S. even though we’re much wealthier and credit-worthy.

That’s because home ownership is a staple of their culture. A Chinese man has no chance of getting a date or getting laid unless he owns a home – no matter how small. __

“No housey, no honey!”

Bubble Trouble Threatens Global Economy

The Chinese government has taken extraordinary steps to halt the stock market slide:
Artificial buying to prop up the market…

Banning pension funds from selling stocks…

Threatening to jail investors for shorting stocks…

Allowing 1350 out of 2900 major firms to halt trading in their stocks indefinitely, and stopping trades on another 750 that fell 10% or more… __

In China, even the bail-outs have bail-outs . . . and so on . . . It all works out for the well-connected investor, but not so good for the average Zhao.

“Money from thin air” is creating a systemic risk to China’s economy. There is no recourse for the unconnected investor, since it is the government itself that is driving this train wreck.

$4 trillion in stock market losses throws a monkey wrench into government plans to rebalance China’s economy.

China’s government can still declare (with a straight face) that the economy continues to grow at an annual rate of 7%. Few intelligent people believe it, but the government can certainly make the claim.

Meanwhile, China’s elite continue moving wealth (and their youngsters) overseas, just in case the worst happens.

… – the country’s affluent have been fleeing their country in droves by moving “temporarily” to major English-speaking cities, in part to get their kids a top-notch education.

Except what they’re really doing is laundering their money out of the country by buying the most expensive real estate they can afford, usually for cash!

China’s government will only put up with this for so long – especially when their economy starts to putter out. They’ll have to stop this exodus sometime in the next year or so, and when they do, it will cause the global real estate bubble to implode. __

This picture bears an eery resemblance to what has been happening inside Russia. Capital flight, brain drain, a flight of talented elites . . .

But China has a large enough talent pool to ride out the worst financial collapse, so long as the people do not join a full-scale rebellion. That is not the case in Russia.

For the present, however, some very dark clouds hover over China’s economy:

The emerging unpayable stock market debts will join the ever-swelling class of Chinese assets that float on the market like those bloated hog carcasses found drifting down the Yangtze some time ago when farmers apparently had not wanted to take responsibility for the diseased, and worthless, herd…

“The highly touted plans for One Belt One Road, the New Silk Road, the Asian Infrastructure Investment Bank, Mega Cities, and Chinese-sponsored pipelines and railroads criss-crossing every continent and tunnelling under every sea will seem less like ambitious plans to ascend the geopolitical power ladder and more like wild dreams of a face-seeking leadership with little but an empty toolkit and even emptier pockets…”
Anne Stevenson-Yang, J Capital Research

Companies and investors have been mortgaging their shares to leverage up in the stock markets, while home-owners have been putting up their houses as collateral as well. __

China bubbles are extremely dangerous, because the Chinese economy has no solid grounding, other than the people of China. The CCP had best take care, so as not to offend, annoy, or cause undue hardship to the Chinese people. But that would require a new type of thinking. Such an attitude shift may not be possible.

Without such a shift, China is doomed to grow poorer than it is at present.

In China, the dual nature of the Chinese economy — one half industrial powerhouse, one half house of cards — has been dramatically revealed. … China is so poor that it would need to add about 50 percent to its per-capita GDP to catch up with Mexico; it is a corrupt autocracy; its banking and financial systems are the stuff of nightmares; its political stability is far from assured. __ Kevin Williamson

Most outsiders do not understand the “Chinese miracle” and how it came about. For that reason, they tend to assume too much about China’s “strength” which is not valid. Children of the skankstream and of the propaganda media are unlikely to suddenly wake up to reality in their waning years.

… one way or another there will be an enormous amount of volatility within the Chinese economy, not just because it is a relatively poor developing country, which have always been more volatile economically than advanced countries, but also because it is so highly dependent on investment to generate growth. Hyman Minsky argued that economies driven by investment are extremely volatile and overly susceptible to changes in sentiment, and he is almost certainly right. __China Markets Summer Comments

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