The China Stockmarket crisis

Written By: - Date published: 12:08 pm, January 5th, 2016 - 103 comments
Categories: business, capitalism, Economy, economy, Financial markets - Tags:

China share market crash

I wrote about the Chinese Sharemarket crash about six months ago and followed it up with this post in August. It appears clear that the steps taken by the Chinese authorities are not working and on the back of poor manufacturing data, increased debt and Middle East turmoil a further sell down of Chinese stocks is occurring. And the rest of the world is feeling the effects.

My first post said this:

The Chinese share market has recently shown strong signs of being a bubble.  Following a sustained increase in share prices until July this year the market then hit severe turbulence, and previous gains have been well and truly wiped out.

Emergency measures were taken by the Chinese Government to slow down the sell off and showed how different the Chinese economy is to the US economy.  Steps included the suspension of the sale of shares once their value dropped by 10%, the suspension of new IPOs, new cheap credit, Government agencies actively buying shares and a ban of share sales by major shareholders.  A sign of how desperate the measures are that over half of all listed companies have the sale of their shares suspended.

But the turmoil in the stock markets has started again with the Chinese Market plunging 7% before trading was halted.  The Guardian has reported on latest developments:

The FTSE 100 index had £38bn wiped off its value as global stock markets started the year with a rout sparked by fresh fears over the Chinese economy.

Investors returning after the Christmas break were greeted by turmoil on stock exchanges, with Germany’s share index posting its worst start to a new year on record and London’s FTSE 100 putting in its second-worst start. As European markets closed, Wall Street looked set for the sharpest new year losses since the 1930s.

The sell-off rippled out from China, where news of weakness in the vast factory sector and a faltering yuan sent Chinese shares on the CSI300 index tumbling 7%, forcing trading to be halted. There was further pressure on the country’s stock market as investors anticipated the end of a ban on share sales by big stakeholders this week.

The deep losses and the share suspension – which came on the first day that China’s so-called “circuit breakers” came into effect – helped send the FTSE 100 down 2.4%, or 149 points, to 6,093.

Germany’s Dax was down more than 4% and France’s Cac 40 fell 2.5%. Oil prices were also volatile as tension between Saudi Arabia and Iransent Brent crude soaring in early trade only for prices to fall later on.

The 7% trigger automatically suspends trading for the day.

New Zealand is not immune.  The NZX has tumbled 1.35% as at the time of writing.

Things may get worse when the six month ban on the selling of shares by major shareholders ends later this week.

103 comments on “The China Stockmarket crisis ”

  1. Ad 1

    When I was 18 I owned 3000 Equiticorp and 3000 Robert Jones. Then 1988 happened.

    Lesson best learnt young.

    • The Fairy Godmother 1.1

      Best to diversify and buy when down. Two shares is dodgy. Now could be a good time to buy. When everyone is buying sell and when they are selling buy. That said the whole system is a mess and you really need to look carefully at the company before buying. My husband spends a lot of his spare time on it.

    • Pat 1.2

      lol, snap Judge corp

    • ropata 1.3

      Lost $500 on Chase Corp, at age 17 (went in with a mate and his dad) … eventually got $20 back

      Lucked in on the dotcom bubble, made $1500 in 1999.

      Never put serious $$$ on the NZX, it’s run by insiders

  2. BM 2

    I think we’ll be ok.
    The Aussies are in trouble though and how that effects NZ is the major concern, could be good, could be bad.

    http://www.businessinsider.com/australias-economy-could-eat-dirt-in-2016-2015-12?amp

    • Rich 2.1

      There is no such thing as a housing shortage and 3% rental returns in the same housing market

      Word. Applies to Auckland in spades.

  3. gsays 3

    This sounds like a good news story.

    We can’t eat money.

  4. Manuka AOR 4

    To what extent is the NZ Super Fund protected from events such as this one that is unfolding?

    A significant percentage is invested in “Global Equities”. Which global equities, they don’t specify.
    https://www.nzsuperfund.co.nz/how-we-invest/actual-portfolio

    • Redelusion 4.1

      Got to take the good with the bad, NZ superfund is long term and well decertified , global equities go up and down, swings can be up to 40 percent, however long term after 100 years of data equities tend to return an average of 5 to 8pc, the volatility of shares is reflected the higher returns. Effective diversification ( company, country, sectors etc) , limited leverage and not trying to pick market or individual companies is the way to go ( ie simply left with market risk and not individual company risk )

      • Rich 4.1.1

        long term after 100 years of data equities tend to return an average of 5 to 8pc

        And you’re planning on living another 100 years to collect on this long term investment?

  5. Rich 5

    I wonder how exposed the Chinese banks are in all this. The yuan (RMB) is pegged by the government, in theory – how long they can maintain that peg has got to be questionable, as is how much dodgy lending has gone on and to what extent the government has been propping everything up.

    In a closed system like China, it’s likely that a banking crash could be worse than in the west and it was nearly pretty bad in the west.

    If the Chinese banks crash, the first thing that’s going to happen (apart from rioting depositors duking it out with the PLA) is that China won’t be able to pay for incoming commodity cargoes – leaving NZ with a lot of milk powder with nowhere to go.

    Next thing will be that the Aussie banks will be in the poo on both sides of the Tasman: defaulting corporate borrowers in the primary industries, the carry trade (on which they rely for funding) drying up as risk averse lenders get as far away from China as they can and both Chinese investors and primary industry workers defaulting on their personal lending.

    John Key will of course offer austerity and depositor haircuts as a solution for all this, whilst leaving his rich friends with as much of their ill gotten gains as he can manage – I wonder if the Greens or Labour will have the smarts to offer an alternative?

  6. Redelusion 6

    Chinese stock market very small percentage of Chinese finance sector, less than 10pc I believe,

    • Agora 6.1

      Deluded again ?

      • alwyn 6.1.1

        I have no idea of the percentage but, if the Economist is to be believed it must be very small.
        I have just been rereading an Economist Special Report (October 3 to 9 edition) that contains this little snippet. “The freely traded bit of China’s stock market is only the size of Switzerland’s”.
        Make of that what you will.

        • Lara 6.1.1.1

          That’s not what I was aware of.

          AFAIK the investment in the stock market in China up to their highs was quite large. Lots of regular everyday people playing on the markets.

          http://uk.businessinsider.com/statistics-on-chinese-invested-in-stock-market-crash-2015-7

          • lprent 6.1.1.1.1

            Certainly the formation of investment clubs and the like out in the rural as well as the urban areas looks like a classic deep gamblers market down to the retail level.

            There were a *lot* of stories like these.
            http://www.cnbc.com/2015/06/10/chinese-farmers-hope-to-harvest-bumper-stock-profits.html
            http://qz.com/443527/chinas-college-students-embrace-stock-trading-thanks-to-money-from-mom-and-dad/
            http://www.ibtimes.com/chinese-stock-market-hits-7-year-high-despite-bubble-warnings-farmers-look-cash-boom-1953995
            etc etc…

          • alwyn 6.1.1.1.2

            That isn’t necessarily in conflict with the view that the amount of money involved may be quite small even though the number of people with some involvement can be large. It will affect how much it worries the Chinese Government of course. Again from The Economist we have –

            “The free-float value of Chinese markets—the amount available for trading—is just about a third of GDP, compared with more than 100% in developed economies. Less than 15% of household financial assets are invested in the stockmarket: which is why soaring shares did little to boost consumption and crashing prices will do little to hurt it.”
            This was from
            http://www.economist.com/blogs/freeexchange/2015/07/chinas-stockmarket-crash

            “Lots of regular everyday people playing on the markets” you say. Doesn’t that remind you, like me, of the days of 1987 when every man and his dog in New Zealand seemed to do nothing but calculate how incredibly rich they were becoming from Judge Corp, Equity Corp, Renouf Corporation, Brierley Investments etc, etc.
            Nobody seemed to care that they had no idea what the companies did. It seemed rather like the South Sea Bubble of 1720.

            That is, however about all I can contribute on the size of Chinese Markets. It was only coincidence that I had just read the first statement I quoted and Chinese investment is not something I ever plan to do so I don’t really follow it.

            Edit. Why is it that while I am composing a reply someone puts something in that is very similar to what I am in the process of typing? I see lprent has commented on the investment club syndrome as well, although he is talking about today in China and I was talking about yesterday in NZ.

            • Lara 6.1.1.1.2.1

              Yes, it totally reminds one of NZ in 1987, up to October that year.

              This from The Global Economy; in 2012 NZ was placed 42nd with China not far behind at 45th in terms of rankings of Stock Market Capitalisation as a % of GDP (a simple measure of how big the stock markets are in each country). It would be interesting to see what % of GDP their market was at the peak in June 2015.

              Interestingly Hong Kong is first by an enormous margin.

              I wouldn’t say that the size of China’s stock market is small at 44.93%. That’s fairly healthy actually.

              It is my opinion that the fallout from the bursting of the Chinese stock market bubble will be the same as the fallout from the bursting of any other bobble in time and place.

              I don’t think the size of that market was small enough to avoid the usual fallout.

              As a % of GDP in 2012 Germany’s stock market was smaller than China’s stock market. And I don’t think that if the DAX plummeted commentators would be so brave as to suggest that the German stock market was too small to affect the German economy. So why are they doing it with China?

              My theory (and this is only an opinion) is that those of us outside of China aren’t yet ready to capitulate to fear. Our markets too will follow, but they’re not there yet. So we don’t want to see it.

            • Pat 6.1.1.1.2.2

              estimated 140 million nationals invested in Chinese share market… the top 10%?….the fact the chinese gov has had to step in yet again to cover their loses does nothing to address the fundamentals that caused the run in the first place.

        • joe90 6.1.1.2

          Can’t be arsed finding actual figures but according to this article the majority of Chinese capital is raised through state owned banks with the stock market dominated by almost exclusively retail investors as a small proportion of their overall wealth.

          http://fortune.com/2015/09/02/heres-what-you-may-not-know-about-the-chinese-stock-market/

        • lprent 6.1.1.3

          Big domestic markets at relatively low income levels produce big amounts of money, just like small rich countries with lots of overseas listing do.

          You really should look at the economic context rather than blathering. From my vague reading of SIX I’ve noticed that there appears to be quite a lot of headquartering going on there. Probably related to taxation https://en.wikipedia.org/wiki/Taxation_in_Switzerland#Profit_tax

          • alwyn 6.1.1.3.1

            “From my vague reading of SIX I’ve noticed that there appears to be quite a lot of headquartering going on there. Probably related to taxation ”

            Is that what is meant by “blathering”?

            • lprent 6.1.1.3.1.1

              Yes, I am glad you recognize the issue.

              I think I replicated your vague tone perfectly, except I said so explicitly and pointed more precisely where to go and find out. If you have a problem with it, then have a look at your comment to see the same things.

  7. Lara 7

    The US indices (specifically S&P500, Nasdaq, Russell 2000, Dow Industrials and Dow Transportation) are all most likely currently in a bear market. Lower highs, lower lows, all below their 200 day moving averages at todays close, and they’ve been persistent in fluctuating about that average for a while (the August move down they were all well below). None of them can make new highs, none of them can stay above their averages.

    It’s pretty common for the transportation index to be a leader. And so far from the all time highs in November last year the Dow Jones transportation index is the most clearly bearish of all, consistently making new lows.

    It is my opinion that this bear market has a long way down to go. I am expecting it to gather steam this year, and not end for another couple of years minimum.

    The Chinese stock market is a classic bubble, still in the process of bursting. The chart of that market is so classic a bubble scenario I have seen it used as an example in study materials of bubbles.

    When I take a look at charts of the European indices it also looks pretty bearish; FTSE, DAX and Hang Seng particularly.

    The Dow Jones World Index is bearish.

    What that means for the non technical analyst is this:

    When the stock markets are very bearish it flows through to the wider economy. Stock markets are often (not always, but most often) a leading indicator of the wider economy.

    What happened after the stock market crashed in 1929? The Great Depression. What happened after the stock market crash in NZ in 1987? A big recession in NZ. And most recently, how did our economy fare after the stock market crash of 2007 – 2009? It was bad enough to call it a “Global Financial Crisis”.

    Higher unemployment, falling or stagnant wages, worse conditions of employment, more homelessness, more poverty, more depression in NZ. Generally a more negative social mood. A tendency to extremes (we’re seeing this in Europe with the rise of the far right already), more violence, the rise of nationalism (in its ugly form) and racism. Generally a mood of “us or them”.

    For those invested in funds like KiwiSaver the amount of your investments will deteriorate. Those funds will be invested in the stock markets, and if they’re all bearish the only escape will be cash. And those funds don’t generally hold cash much if at all. The best you can hope for is the fund managers know what they’re doing and put funds in sectors that do better in bear markets (examples: consumer staples and services) and avoid sectors that normally perform worse in bear markets (for example financial and utility sectors).

    Or your fund manager may move funds from the stock markets to forex or commodities where they could actually increase funds and not see it all erode. But TBH I don’t have any faith in fund managers at all, they didn’t have a good track record for the last bear market of 2007 – 2009 (the Global Financial Crisis). I expect they’ll have a similar track record this time around.

    In a widespread bear market the best place to put your money is in cash (but be careful, NZ banks can take a “haircut” of your money if they get into trouble, Cyprus is an example of how that works).

    The best defence is to reduce debt.

    All those middle class folk in Auckland who have happily been increasing debt by mortgaging the house to the limit based on rising prices to buy their “investment” properties, BMW’s and jetskis may find the party is over soon. If they lose an income they may find themselves with negative equity, the house on mortgagee sale and their junk on TradeMe. Over-leveraging in a property market boom on the assumption that the boom will never end is just as risky and dumb as over-leveraging on a stock market boom.

    Looking at charts of the Auckland property market it too looks like a textbook bubble.

    One of the things about bubbles (which no government ever seems to learn) is there has not been ONE example of any government, central bank or other entity able to halt the decline once fear sets in. They all try, but none have ever managed it. Once fear sets in there’s nothing anyone can do except try to avoid the carnage (or short sell).

    This is my opinion only. But it is an educated and experienced opinion. Analysis and trading is what I do every day. I expect plenty here will disagree with my opinion, and that’s fine.

    • lprent 7.1

      I expect plenty here will disagree with my opinion, and that’s fine.

      I don’t. It has been pretty obvious for quite a while that there has been no real growth in any part of the world out there for quite a while. Apart from maybe sub-Saharan Africa (excluding the corruption pit of South Africa) and it’s extremely low base.

      Personally I think that what we are steadily seeing more of is the slowing of population growth across almost all countries and the effect of the aging demographic. That also means that the causation of bubbles is no longer alleviated as much by so many dumb over-optimistic youth. Think of the conservative investments of the last couple of decades of stagnant Japan being applied worldwide.

      But I also suspect that most of the commenters here are likely to be even more pessimistic than you or I are.

      • Lara 7.1.1

        My language may be mild and polite, but I do expect conditions economically and socially to be getting much worse over the next few years. MUCH worse.

        I would probably be one of the most pessimistic people here I expect.

        I’m putting my money where my mouth is too.

        Interestingly enough, the global birth rate is now very close to replacement rate. Which means once the cohorts are filled up the global population should stabilise.

        Except I expect that famine, war and the collapse of ecologies will reduce our populations first.

        As far as I can tell NZ is probably the best place to hide out. And hope for the best. While preparing for the worst.

        • Karen 7.1.1.1

          I don’t think you are being pessimistic at all , Lara. I think you are being realistic.

        • One Two 7.1.1.2

          I’m putting my money where my mouth is too.

          Short ?

          • Lara 7.1.1.2.1

            Yep.

            • Paul 7.1.1.2.1.1

              what does short mean in layman’s language?

              • alwyn

                Here is a reasonable definition in simple terms.
                It is out of
                http://www.investopedia.com/university/shortselling/shortselling1.asp

                “Short selling is the selling of a stock that the seller doesn’t own. More specifically, a short sale is the sale of a security that isn’t owned by the seller, but that is promised to be delivered. That may sound confusing, but it’s actually a simple concept. (To learn more, read: Benefit From Borrowed Securities.)

                When you short sell a stock, your broker will lend it to you. The stock will come from the brokerage’s own inventory, from another one of the firm’s customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must “close” the short by buying back the same number of shares (called covering) and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.”

                I’ve never done it myself, too nervous personally), but here is a broker that offers the service
                https://www.forsythbarr.co.nz/investing-with-us/le-short-selling/

                Read more: What Is Short Selling? | Investopedia http://www.investopedia.com/university/shortselling/shortselling1.asp#ixzz3wP0b1QWD
                Follow us: Investopedia on Facebook

              • Pat

                basically betting that a stock price will weaken

                • Paul

                  And how do people without shares prepare for this crash, apart from removing debt.

                  • Rich

                    Debt’s fine (in the short term), so long as you can manage the interest payments.

                    If there’s a bank crash, chances are there’ll be a Cyprus style haircut where the government (protecting their mates) will take depositors money (40%+ in Cyprus) and use it to bail the bank out. They won’t increase debt’s though, so if all your accounts are overdrawn, you’ll be fine.

                    When you hear a Chinese bank’s crashed, that’s the signal to make sure you’ve got as many banknotes as your bank will let you take out stashed somewhere.

                    • Paul

                      That could be messy.

                    • Pat

                      the implications for NZ of a chinese sharemarket crash are more to do with economic activity and contagion effect on other markets (including NZ) rather than threats to the banking system here, think substantial local company closures and unemployment from reduced activity…how the chinese gov will deal with the fallout from a crash is anyones guess but as amya points out the social ramifications in China may well be dire.

                  • Rich

                    Debt’s fine (in the short term), so long as you can manage the interest payments.

                    If there’s a bank crash, chances are there’ll be a Cyprus style haircut where the government (protecting their mates) will take depositors money (40%+ in Cyprus) and use it to bail the bank out. They won’t increase debts though, so if all your accounts are overdrawn, you’ll be fine.

                    When you hear a Chinese bank’s crashed, that’s the signal to make sure you’ve got as many banknotes as your bank will let you take out stashed somewhere.

                    • alwyn

                      That is not what a “haircut” would do.
                      The Government will not, repeat not, ” (protecting their mates) will take depositors money (40%+ in Cyprus) and use it to bail the bank out.”
                      I have several goes at explaining on this blog how the Government would handle a bank that went broke and it doesn’t involve the shareholders of the bank being left with any equity in the bank if it went belly up.
                      Why don’t you have a look at how it will work before you repeat this drivel you are offering.
                      The RB has plenty of stuff that explains it so simply even you should be able to understand it.

    • Ad 7.2

      Very sobering.

      Appreciate your expertise and experience in this area.

      • Lara 7.2.1

        You’re welcome.

        • Andre 7.2.1.1

          Lara, a bit off topic but since you seem to be willing to spend a lot of time trying to educate numpties, this financial numpty has a question about something that’s been bothering me a while.

          What downsides do you see about trying to reduce the amount of high frequency trading ? Something like a financial transaction tax, or deliberatively punitive taxes on capital gains on assets held for short periods? I can already hear the cries of “but, but, LIQUIDITY”, but that doesn’t look like a big deal to me. Similarly, I can see that price differences between willing buyer and willing seller will get a bit bigger and last a bit longer, but I don’t see how that creates a problem either.

          It does seem to me HFT has serious downsides, flash crashes being one, the fact that it’s a purely parasitic activity skimming money that should really go to buyers or sellers with longer-term timeframes is another.

          If you’re willing to respond directly, or can point me to something useful, I’d appreciate it.

          • Lara 7.2.1.1.1

            I don’t see too much downside actually to reducing HFT trading. Markets functioned very well prior to it’s inception and so if it was removed they’d still function well.

            And a financial transaction tax would have an effect on HFT I expect.

            HFT doesn’t necessarily add liquidity to a market. HFT is the method large firms use to execute trades. If they weren’t using this method they would probably still be trading with the same funds using another method, but probably still short term. That’s why I say it doesn’t necessarily add liquidity. But to be fair, that is an assumption that if they couldn’t execute HFT they’d use the same funds in the market anyway. Because it’s the funds, the readiness of funds to act as buyer or seller, that creates liquidity.

            What HFT is often used for is arbitrage; execution of a spread in two highly correlated markets. For example; a spread may be executed for a specific currency when a trader finds a difference in the quoted rate between two locations, say a difference in the Mexican peso quoted in Frankfurt and Tokyo. The trader would buy at the lowest rate and then sell at the higher rate to make a profit, but the difference is small so the trade is big to make a profit. The effect of this would be to bring the rates closer together, removing the difference. So it’s executed very quickly.

            There are several reasons for the flash crash and HFT is only part of it.

            It seems the main culprit that started it off was a huge order to sell on the E-Mini S&P contracts of about 4.1 billion dollars. Fear was part of it. HFT was another part. And the market rebounded quickly. And the primary trend resumed.

            Your perception that HFT is purely parasitic really relates to trading. HFT is just faster trading. All trading on markets, like what I do, is parasitic. It does add liquidity (in that allowing more people and more money to be active adds liquidity), but really that’s about it. When I trade and make money I’m sitting in front of a computer screen clicking buttons… I’m not making any product or providing any service for anyone but I’m making money. That’s pretty parasitic actually. I have no illusions that I’m performing a good public service or contributing much at all by profiting in this way. But this is the system I live in and I happen to be good at it.

            Liquidity is a good thing though. If you are a producer of a product, say corn, and you want to sell your product, if there are plenty of willing buyers in a global market then you can get the product sold at a transparent price quickly. If buyers were limited and it couldn’t be traded globally then selling your product would be a lot more difficult.

            I do a bunch of volunteer work to try and balance it out.

            As for deliberately punitive taxes on capital gains? We do already tax profits from trading. I pay tax on all the money I make. A higher tax rate on this kind of profit from this kind of activity? Now you get all kinds of unintended consequences, loopholes and expensive enforcement of it.

            A financial transactions tax would be simple and easy to enforce. Everyone would have to pay it, but for regular people they’d hardly notice it as the rate would not need to be high. 0.1% would be enough to raise a lot of tax revenue.

    • One Two 7.3

      The Dow Jones World Index is bearish.

      What that means for the non technical analyst is this:

      When the stock markets are very bearish it flows through to the wider economy. Stock markets are often (not always, but most often) a leading indicator of the wider economy.

      What happened after the stock market crashed in 1929? The Great Depression. What happened after the stock market crash in NZ in 1987? A big recession in NZ. And most recently, how did our economy fare after the stock market crash of 2007 – 2009? It was bad enough to call it a “Global Financial Crisis”.

      And the common denominator in every ‘financial crisis’ is …….?

      • Lara 7.3.1

        The common denominator is greed and fear.

        And people participating in a “market” dominated by their human emotions of greed and fear.

        We’re currently doing the same thing with property.

        It’s not the idea of a market as such, it’s more that it is human beings dominated by greed and fear participating in an activity together.

        • One Two 7.3.1.1

          Those play their part, that much is sure. The part they play has shrunk significantly IMO. (Not including propery)

          For mine, it’s the manipulation of [all] markets which is the core common denominator +/- 100 years

          Post ‘big bang’ , the ability to manipulate markets ,effectively became ‘total’

          • Lara 7.3.1.1.1

            I hear that complaint, that the markets are manipulated, quite often.

            Here’s a POV on that idea.

            If it is possible to manipulate a market then with all the power that the CCP have in China, why are their efforts to hold up their stock market not working?

            After all, in the example of China the CCP write the rules to suit themselves, have a large proportion of funds in their market under their control, control a lot of the debt and essentially all the money in China and can enforce their rules on the market without reference to annoying things like prior existing laws or constitutions. They’re the closest thing to a God of markets there ever will be.

            And yet it falls.

            I understand how markets can be manipulated short term (for example I’ve read “Reminicences of a Stock Operator” which explains how it can be done quite nicely in some examples) but big long term manipulation? Markets totally manipulated?

            I’m not buying it. Especially a bear market. Once fear takes hold its just a stampede, everyone wanting to get out all at once, crowd psychology on a grand scale.

            Most of the high frequency automated trading that is blamed for manipulation is done in very large amounts VERY short term. Seconds, minutes, to exploit differences in markets which will only exist short term. For example, a slightly different quote in the Gold cash price in two different geographic locations. What that kind of HFT does is to bring the differences back into line. Its not creating big movements.

            • One Two 7.3.1.1.1.1

              If it is possible to manipulate a market then with all the power that the CCP have in China, why are their efforts to hold up their stock market not working?

              I was not specifically referring to China, or the immediate goings on in that market

              Most of your response confirms how manipulation does, and is happening

              Long term manipulation occurs through degregulations and witnessed via LIBOR, ISDAfix, FX rate fixing, futures/options and ratings agencies. Of course the central bank rates are also long term market manipulation

              Legislation which creates manopolies also plays a major role in the manipulation of markets

              The description of HFT you provide is reflective, buts its been going on for +/- a decade or more and functions as a price setting mechanism. That makes HFT a long term manipulation mechanism in a pure form

              Market short sellers such as yourself, have bet on the stampede by using a market manipulating instrument. The psychological aspect does exist, but the emotional triggers can be controlled. Emotion is for the victims

            • Simple Simon 7.3.1.1.1.2

              Lara wrote-

              I understand how markets can be manipulated short term (for example I’ve read “Reminiscences of a Stock Operator” which explains how it can be done quite nicely in some examples) but big long term manipulation? Markets totally manipulated.

              With due respect Lara, manipulation is far more sophisticated now than it was in the early 1900,s when the Bucket Shops were in operation.
              Those days there were simple ticker tape machines, now days we have computers and crooks, and manipulation.

              And yes, I have read and own a copy of the above book and it well worth the read.

              • Lara

                I understand how HFT works. And that’s usually what gets the blame for manipulation.

                I repeat, if it is possible to fully manipulate a market then how come the CCP can’t hold up the Chinese stock markets?

                I understand how short term swings can be manipulated. But not longer term trends. I’m still not buying it.

                • One Two

                  Perhaps you managed to miss the references I made that enabled long term market manipulation

                  There are many more mechanisms existing in the past and present, than I referenced it was not exhaustive by any means

                  As a Technical Analyst, you should know what I have been talking about

                  Perhaps not

                  • Lara

                    I understand your references, yes.

                    I understand how this can influence short term swings, and it does appear that central bank pumping of funds into the markets has held them up over the years… or what we’ve seen since March 2009 is just another typical bull market. But at the end of the day I think we shall see that these manipulations are not going to be able to stop a bear market.

                    I do know what you’re referencing to. I just disagree. I’m not stupid nor lacking in experience nor qualifications. I just disagree.

                    And I repeat my original point about market manipulation.

                    If markets were so easily manipulated, how come the CCP can’t hold up the Chinese stock markets?

                    It’s not for lack of intervention.

              • Lara

                I wasn’t actually referring to what he wrote about in the Bucket Shops. I was referring to some of the manipulation he wrote about in the cotton and wheat markets via the exchanges, not bucket shops.

                Just because HFT has been going on for a long time does not mean it is manipulating the primary trend. It can impact price by small amounts in amount and time. That does not mean it impacts the larger trend.

                Short selling is not manipulating the market. It provides an out for willing sellers. It adds liquidity. Your assertion that short selling is manipulating the market is not my understanding of it, and I have never read that interpretation in any technical analysis textbook. Ever. Citation needed if you wish to continue such an assertion.

                Vernon Smith was the first economist to find find and study a bubble in an experimental market. One of the surprising findings from his work was that a bubble is more likely to be found when short selling is difficult.

                Manipulation of the LIBOR rate is an obvious example of manipulation of a rate. But the LIBOR rate is the rate set by banks between themselves. It is not a rate of an openly traded market with volume.

                When I’m speaking of market manipulation I’m talking of the indices, equities, forex and commodities. Large markets, globally traded, with huge volumes. Price determined by supply and demand; supply and demand of buyers and sellers.

                Your comment actually offers zero evidence that the primary direction of a market is being manipulated by anyone in any way. It’s just another assertion that “it’s all manipulated”. Which I hear everyday and yet have to see any real evidence of.

                • One Two

                  Over the 20-month period, Heath used complex trading products called contracts for difference (CFD) and traded through no less than nine separate share trading and CFD accounts, which allow traders to bet on the future price movements of shares, commodities or currencies

                  CFDs – A trader would know all about them. You appear not to

                  Imagine what a scaled up operation can do…

                  ” No real evidence ” = Head in sand or lying. Same thing from someone claiming to be a technical analyst

                  Your view that HFT creates liquidity is incorrect. As is your view that HFT are not market manipulation

                  Oh and look. The FCA investigating Lloyds for Gilt market manipulation. That’s news from yesterday

                  • Lara

                    That’s an interesting assumption. I actually trade CFD’s so I do know what I’m talking about.

                    HFT manipulates the market. Short term. I have never said otherwise. And I have never said it creates liquidity, I said it brings small differences in price back into line. If you’re going to have a dig at me and call me a liar then please do at least read my comments and get your claims straight.

                    Short selling creates liquidity. And I’m still amazed that you call short selling market manipulation. That’s a rather extraordinary claim to make. No technical analysis textbook I have read has EVER made that statement.

                    And your example of manipulation of the Libor rate is NOT an example of manipulation of a huge globally traded market with millions of participants.

                    Just because I’m not agreeing with you doesn’t mean I don’t know what I’m talking about, nor does it mean I’m wrong and you’re right.

                    We just disagree on the impact of market manipulation.

                    Plenty of traders and organisations with deep pockets will try to manipulate the markets, and plenty of them will achieve it short term. My stance is that it is not possible to manipulate a large globally traded market long term against its primary trend direction for any reasonable period of time.

                    You STILL have not addressed my main precept: if a market can really be manipulated, then how come everything the CCP is doing to the Chinese market isn’t working? They try to hold it up, and still it falls.

                    Your comments have now gone from just slightly rude to outright calling me a liar.

                    I have nothing further to say to you. I will not continue to engage with rudeness and hostility.

      • alwyn 7.3.2

        Actually it is generally agreed that the US entered into depression two months BEFORE the stock market crash.
        https://en.wikipedia.org/wiki/Great_Depression_in_the_United_States

        • One Two 7.3.2.1

          How does your comment relate to manipulation ?

          • alwyn 7.3.2.1.1

            It doesn’t.
            It relates to this statement in the comment I was replying to which says
            “What happened after the stock market crashed in 1929? The Great Depression. “. I am merely pointing out that the start of the depression was not after the stock market crash but preceded it.

            • Lara 7.3.2.1.1.1

              The economy went into recession in August.

              The crash began in October.

              Recession and depression are not the same thing.

              • alwyn

                You are technically correct. However I’ve never seen an economist who was willing to offer a strict definition of a depression.
                I offer you this definition of the difference
                http://www.economicshelp.org/blog/2226/money-personal-finance/difference-between-recession-and-depression/
                One should note that a recession is usually defined as being for a shorter period, ie two quarters, than a depression. Thus any depression, like the Great Depression, must start with a recession which would be the first two quarters of the overall depression.
                I think it is quite fair to say that a recession does not necessarily turn into a depression BUT that a depression will start with a recession and that is what happened in 1929 in the US.
                The best book I have ever seen on crashes was by Prof Kindleberger of MIT It was called “Manias, Panics and Crashes and was published in about 1978. Still relevant and readable.

                • Lara

                  That’s the problem. I focus on technicalities.

                  Plenty of recessions don’t turn into depressions.

                  But a recession which begins and then sees a massive stock market crash may then turn into a depression.

                  Yes, it’s a technicality, but a rather important one IMO.

                  I think we are both agreeing, but I’m pickier on the technicalities of the thing.

                  It’s still my position that a stock market crash most often (not always) that is big enough will come before a downturn in the economic cycle.

                  And that’s the problem with technical analysis and economics in general. Most often is not the same as always. There will always be exceptions.

                  My basic point in regards to the collapse of the Chinese sharmarkets (and others) is that it will have consequences in the wider economy, and those consequences usually (not always) develop AFTER the markets crash.

    • Lanthanide 7.4

      Are you familiar with Gail The Actuary? If not, you may find this very interesting: http://ourfiniteworld.com/

      • Lara 7.4.1

        Thanks for the link Lanthanide. I’ve not come across that before.

        From a quick perusal of her writing my take on why markets move up or down is mutually exclusive to her explanations.

        Other than that it looks pretty interesting.

        • Lanthanide 7.4.1.1

          She’s looking at current and long-term future trends, rather than explanations for why markets move up or down.

          • Lara 7.4.1.1.1

            She’s using fundamental reasons to explain market trends.

            I’m a technical analyst, and a contrarian one at that. It’s different. And much of the methods I use are mutually exclusive to fundamental analysis.

            So I disagree with much of what she’s written.

            That’s okay. Most people would disagree with my explanation of why markets move the way they do. I’m happy to disagree, and I’ll keep much of my reasoning to myself thanks as it would probably be scoffed at.

            My trading account is at the end of the day quantitative proof that I know what I’m doing when it comes to analysing markets and figuring out the next most likely direction.

      • left for deadshark 7.4.2

        Good link here folk’s. 😉

    • Paul 7.5

      Brilliant and realistic and sobering analysis.
      Should be a post in its own right.

  8. Ralf Crown 8

    Both the article and the comments reflect how badly Kiwis understand China. In a country as USA about half the population has savings, like insurance and retirement that depends on the share market. In China it is 5%. The share market in China can best be likened to a roulette game. Many people gamble small amounts on speculation, amounts they can afford to loose. Investment in China is done in persons, not companies, and mostly outside the banks and share market. The banks are hardly affected at all by a share market decline, but this system is a huge headache for the government who want people to use the banks as money can be controlled that way. They call it shadow banks and shadow investment, but people do not trust banks in China. They trust cash. The risk is much higher with New Zealand banks and kiwi saver. Remember that in the beancounter run New Zealand some 60% of investment companies went down the tube, and several banks were saved by tax money. China fared much better.

    • Lara 8.1

      A stock market crash is still a stock market crash. It still leads into the wider economy.

      And from what I have read so far investment in the Chinese stock market was widespread, regular every day people. Sure, some investing little amounts they can afford to lose, but also plenty investing what they cannot afford to lose.

      When stock markets crash they tend to result in economies doing rather poorly afterwards. Particularly if those who lose money in the crash were playing with borrowed money. As many were in China.

      I would be completely surprised if China does not take some time (years) to recover from this. And at this time I don’t think the crash has found the bottom yet.

    • mickysavage 8.2

      You may be right as far as China itself is concerned but my post was about the effect on the world’s economy. It seems to me that far too much of the world is leverage and any disruption has significant ripple effects.

      • GregJ 8.2.1

        Yes – which surely is the point – not so much how many Chinese are invested in their stockmarket but what the exposure of international banks, funds and companies are to the Chinese stockmarket. It’s clear that the inter-connectedness (is that even a word?) is the real issue – if China sneezes does the rest of the world get a cold (or the bubonic plague)?

        • Pat 8.2.1.1

          as the worlds second largest economy and i think the largest export economy , if China goes into meltdown or even recession the rest of the world will know about it….if the demand doesn’t come from China there is a dearth of replacement candidates….ultimately it will impact western banking but only after the rats and mice have been dealt to.

      • Ralf Crown 8.2.2

        I agree with you there. Unfortunately stock markets around the world have turned into casino games rather than investments and are too much tied together, but to correct the problem we must first understand it. When it comes to China hardly anyone outside the country understands. China is not a different country, but a different world, just about everything reacts differently to movements and activities. The real serious problem is the US markets and the almost totally absent controls and guiding and the disastrous US economy. It is the Wild West, and China has tried to copy that under pressure. As we see it works as badly as the “democracy” they tried between 1912 and 1949. Long term we must develop new ways of managing finance that is just not based on quick speculation profits as presently is the case. Those foreign investors who now are loosing money in China are those who gambled on the market, just as people in New Zealand gamble on an ever increasing real estate prices. Somewhere the circle breaks. It is like a chain letter.

  9. amya 9

    Some context I think is in order, as any crisis in China that is not addressed very quickly will have huge danger for whole world, but not just in ways contributors here have identified.

    China faces huge problems. Young people extremely well educated, travel extensively and have spent their entire lives with extremely rapid improvement in living standards

    I am 47, when child we were constantly hungry, amthough in the mide life. where I lived, horse and cart were main transport. Now, the middle standard of living much like nz. In my parents young life, famine and extreme control of individual by government. It difficult for people in West to understand the extreme rapid change of last 25 years. But little social or political change.

    All the young people know is this rapid and consistent improvement in living standards. They put up with the lack of social freedom, political freedom and government control as they have future. But many many young people over last 5 years struggle hard to find job. And often a ‘gift’ or bribe necessary to gain even low positions. Well educated, study overseas and exposed to true freedom, and no job or poor job and a declining or even stagnating economy means huge problems ABSOLUTELY will occur in China in next few decades. Probably sooner.

    As China is an empire, where community party rule without question over an empire where the areas richest in resources are ethnically culturally linguisticly and religiously not han and speak language other than mandarin, and suffer extreme discrimination and bigotry, there a social explosion inevitable in near future.

    1 in 5 people on earth are chinese. So in this century, thus is big danger to NZ economy.

    • Rich 10.1

      They should have stayed out of all markets. Just like western central banks

      ROFL!

      Central banks (certainly in developed economies) do little else but intervene in markets. Indeed, a book I read recently identifies a core difference between neo-liberalism and classical liberalism as being the former’s use of government intervention to create and sustain “markets”.

      Look at Auckland house prices – the boom is a consequence of the government deciding to maintain easy credit and not tax an income class, in order that middle class people can enjoy (illusory) wealth increases from their assets.

  10. amy 11

    Apologies for poor spelling in my post yesterday (no reading glasses!). Thank you Paul for link to article. I really cannot make much comment on economic matters as have no large understanding. However, some points from article and my experience I can make.

    ALL that community party knows is control, so of course they will attempt to control stock market from ‘top down’! This is the operating method they will use until the end of their rule. It is all they know and an increasingly desperate cling to power (although Mr Xi appears very hard to be trying to force change but after almost 70 years of Community Party holding absolute unquestioning power in New China, I think he will face a near impossible task.

    I believe that China could still be ‘economic savior to the west’ as article says, as there are huge oil and gas discoveries in Xinjiang, Mongolia and Xizang (Tibet). These dwarf those of the middle east and largely not even close to production. This will lift locus of power from Middle East and its instability to China. Also, China now increasingly produces high quality goods that rival those from the west in quality (although most Chinese goods in NZ shops are of the very lowest quality. Not understand why. Reflects badly on China.) Additionally, young Chinese crave western goods like BMW, Apple and so on. This will help west.

    But as my post yesterday say, real danger is if China socially implodes (and it already is starting to see frequent Islamic terrorist attacks from the Uighurs), and the young people rise up. This will be the worst disaster for the west it is possible to imagine. sadly i think that the community party will only ever give up power by force of a revolution, like was attempted with Tienanmen Square 1989.

    • Ad 11.1

      New Zealand and in particular Auckland has relied on Chinese immigration and Chinese capital for a couple of decades now. Both have been hugely beneficial to our society and our economy. New Zealand relies on China’s stability – and everything that I have seen from the Chinese government is that they will do everything that they can to sustain stability and growth.

      I had no idea about China’s internal oil finds and will do some hunting on that. In fact, on the contrary, reports from last year showed a clear peaking for its own production, no incentives at this barrel price for much exploration, and very pessimistic about Chiense shale:
      http://thediplomat.com/2015/07/china-peak-oil-2015-is-the-year/

      I’d be interested to see real analysis on the broader Chinese resource strategy and its political impacts.

      I don’t see your evidence for predicting a great Chinese implosion however. So far, China and Australia have been sound bets for New Zealand.

      • amy 11.1.1

        The signs of Chinese implosion were first seen by the west in 1989 (Tienanmen Square), which was an attempt at a violent overthrow of the Community Party at all levels. Rising levels of prosperity and increased freedom since then have kept the people very happy, despite the incredible lack of social and political freedom that still exists. If this prosperity dies or stagnates, huge problems will occur.

        And of course Community Party will do everything that it can to encourage and sustain growth. Only that will allow them to survive. That is the point I make. Take that away and Tienanmen Square will seem like a Sunday picnic.

        The signs of great Chinese implosion that you do not see are in fact very evident. Uighur terrorism is becoming very big problem. Increasing dissatisfaction among the young. Increasing resistance by the provinces of control from government. In fact, increasing resistance throughout China.

        Do you seriously think that the people of Xinjiang will continue to allow this situation to continue? Or the peoples of Mongolia? Or Sichuan? These will be as Chechnya was to Russia.

        And yes I think you are correct, NZ has benefited from Chinese immigration and the capital that we bring (unfortunately you will find that most of that capital stems from corruption). And this I tell you from personal experience.

        • Ad 11.1.1.1

          – Tinanmen was 27 years ago. They got the message.
          – Last major Uighur protests were 2009.
          – Hong Kong protests last year fizzled flat.

          Maybe you’ve got better on the ground experience about social disruption in China. I can’t tell. You need to start adding some actual evidence to your assertions that China is at some massive risk of falling apart.

  11. amy 12

    Totally incorrect. Most recent that was reported is October 2015. Xingang coal mine. Kunming 2014. Many many others. Just try Google. I typing this on my cell phone so not easy to post a link. Just do 2 minute Google search.

    Hong Kong is China in name only. It is more like Taiwan than China in my view. Culturally and politically. They have far greater freedoms than in China proper.

  12. Ralf Crown 13

    Both the article and the comments reflect hob badly Kiwis understand China. In a country as USA about half the population has savings, like insurance and retirement, that depends on the share market. In China it is 5%. The share market in China can best be likened to a roulette game. Many people gamble small amounts on speculation, amounts they can afford to loose. Investment in China is done in individuals, not companies, and mostly outside the banks and share market. The banks are hardly affected at all by a share market decline, but this system is a huge headache for the government who want people to use the banks as money can be controlled that way. They call it shadow banks and shadow investment, but people do not trust banks in China. They trust cash. The risk is much higher with New Zealand banks and kiwi saver. Remember that in the beancounter run New Zealand some 60% of investment companies went down the tube, and several banks were saved by tax money. China fared much better.

  13. tory 14

    new Zealand perspective its our massive house hold debt thats going to sink this economy.
    this article by Bernard Hickey shows how reckless the banks have been and stupid and greedy our fellow citizens have been.
    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11545650
    to borrow 5 and up 7 times your income is stupidity to the max ,the people who payed for this recklessness are savers the youth people trying get there own homes and renters. when the music stops the debtors will blame everyone but themselves we must make sure the poor who have nothing to do with this mess don’t get the blame
    the big short and the inside job should be compulsory viewing

    • John Shears 14.1

      @ Tory, Thanks for the article reference.
      I found it very interesting as our first house was in Wellington back in the late 50’s and having arranged to capitalise the family benefit, plus our meagre savings plus an interest only loan for 5 years from a lodge, and finally an arrangement with the bank for an overdraft finally we owned a house.
      It needed re-piling,repainting, and its first do-up in about 30 years after being a renter all that time. After 5 years of hard work it was a very pleasant house and sold readily when I was transferred to Auckland some 7 years later.
      It belonged to my boss at the time we bought it and I can still hear him saying to the Bank Manager who had just said ” You realise that banks don’t normally lend on house purchases Ted” , and Ted said
      ” Come on Mac if you don’t lend it I will and that will come out of your bank anyway.”
      deal done.
      How times have changed

  14. Vaughan Little 15

    Could I move from the floor that the blog title be renamed “The Chinese stockmarket IS A crisis”?

  15. Rich 16

    Limit down again today.

    In my experience, if you have a dead short on a circuit, every time you reset the “circuit breaker”, it will trip again.

  16. When it comes to finance management, it is extremely difficult when it concerns a really huge country with constant fluctuating stock market patterns. Hence, it is relatively easy to see where the bubble is surrounding the China stock market as the exterior of the situation is quite obvious.

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