Another Side of the Crashing Chinese Stock Markets: The Devaluation of Chinese Currency

If the plunge of Chinese stock markets were to take place after the internationalization of RMB(the Chinese currency, Yuan), then the stock market crisis we are facing today would be far worse. The bursting of the Chinese stock market bubble will definitely lead to the end of the also enormous bubble in the real estate sector. However, this is not the worst part. The devaluation of the overrated Chinese currency will hit China subsequently. The crashing Chinese stock markets will bring tremendous negative impact on the Chinese currency, devaluating the overrated RMB dramatically as a result.

(Chinese Version)

China is now completing its last two tasks to roll out its financial reform, which are the internationalization of RMB and the marketization of interest rate. However, the sudden turmoil occurred in the stock markets might disrupt the whole process and make everything more complicated than ever.

Once RMB is internationalized, another major economic plague may be triggered by the fragile and chaotic stock markets, that is, the Japanese disease (long-term economic slowdown and an aged society). What China really should do after achieving partial success in saving the stock markets is improve relevant policies that can prevent the stock markets from tumbling once again. Besides perfecting relevant policies, it’s also essential to ensure that the stock market would remain stable and could change in accordance with companies’ revenue status.

All the efforts backfired

According to statistics from UBS China’s chief economist, by the middle of this June, the composite index of Shanghai Exchanges jumped 152% compared to that in last July. And when compared to early this year, the index is increased by 59.9%. The index of SME Board and GEM board jumped 138% and 165% respectively when compared to earlier this year. Besides monetary easing policy and encouraging news on financial reform, factors such as individual investors’ mass rush to the stock markets, the government’s support and optimistic speeches from state-owned newspapers also contributed to the big surge of the stock markets in China.

That being said, before the crash, major stockholders and executives of listed companies had all cashed out to secure their money. But to be clear, from the second half of last year to May this year, every major media outlets had also been contributing to the fevering rush to the stock markets. Some articles even claimed that the bottom exchange index for this round’s bull market would be 4,000, which gave many investors the illusion that this time they were welcoming a country-level bull market. Additionally, individual investors were everywhere and their existence and the arousing news about making a fortune in the stock markets set everyone on fire, many of whom later also became players in the stock markets. This rush brought thousands of millions of Chinese people into the market. Whether it’s ordinary people or rich individual investors, they all joined the great rush to make a fortune.

Out of control

For fear that the stock markets might become a huge bubble and the growth rate of leverages get too high, the Securities Regulatory Commission of China started to enhance supervision and regulation on margin trading and money that are being lent to investors, put on high risk alert, supervise and regulate loans, and forbid securities companies to provide conveniences for borrowing money for stock investment (including umbrella trust fund, providing data and IT service). Due to the intensifying pressure from regulators, money-lending companies started to require their clients to lighten up or close out their positions, which in some way contributed to the crash-landing of the Chinese stock markets. In the meantime, the Securities Regulatory Commission was pushing the speed of examining and passing IPOs and during that time the number of companies that passed the standard jumped from 69 in the first season to 130 in the second season. Mass of newly listed companies attracted a large amount of capital to flow into the market.

According to Wang Tao, unlike the past, there are many leverages existing in the surge of this round’s stock markets. By July 7th this year, the balance of margin trading that securities companies had was 1.6 trillion RMB, a bit lesser when compared to the peak number 2.27 trillion RMB in June. But it still has a 57% growth if we compared it to the beginning of this year. The more important thing here should be the money that was borrowed to invest in stocks. These non-transparent and efficient-supervision-and-regulation-lacking leverages continued to grow in large proportion in the past year, which increased the leverage level of the entire market. Currently the number of such capital is about 1 to 1.5 trillion RMB, including leverage products such as umbrella trust fund, P2P lending platforms, lending companies, and subsidiaries of foundations, securities management service etc. The surging leverages intensified the selloff rush that was first caused by overvaluation and the tightening supervision and regulation. The stock price then went down as the pressure of leverages went up, once again forcing investors to sell off, which worsen the leverages. It’s a vicious cycle.

The crashing stock markets led to the buy-back rush to equity fund. The worst part was that to reduce the damage, many companies suspended, so that the number of suspended companies reached around 1,700 every day. To call back the cash, many fund companies had to sell off low price earnings ratio stocks, which happened to be state-owned fund organizations’ stocks aimed to save to the markets. Subsequently, the markets continued on a ride of roller coaster and many people even committed suicide for it.

Great pressure, and even more concerning worries

If the plunge of Chinese stock markets took place after the internationalization of RMB(the Chinese currency, Yuan), then the situation now would be far worse. The bursting of the Chinese stock market bubble will definitely lead to the bursting of the also enormous bubble in housing and this is not the worst part. The devaluation of the overrated RMB will hit the market with a devastating blow subsequently. The Japanese Disease, which has plagued Japan for years, will strike China as well. China is also becoming an aged society and the worst part here is that China is not rich enough yet and is still controlling birth rate.

Back to December, 2013, I had also written an article called Devaluing Chinese Currency Can Prevent The Japanese Disease on ChinaTimes. Back then the stock markets in China were stable and there couldn't have been a crash to begin with. But who could predict that the internationalization of Chinese currency wouldn’t lead to the situation today where magical A shares made lots of stocks’ price jumped several times in a short period and created a fast-growing bubble that burst later.

In a normal financial market, stock price is influenced by the economy and companies’ performance. However the Chinese A shares weren’t normal at all, not even close to the basic principles of economics. Their prices weren’t affected by the economy or the performance of companies, but were led by government policies.

In the middle of May, market-saving policies launched by the authorities did have a certain power to improve the situation, but the actual outcome was, apparently, disappointing and even made the crash even more violent.

In the past two weeks, authorities took initiatives and tried to save the market. The Central Bank of China reduced the interest rate by 25 base points and lowered the deposit reserve ratio in an attempt to help the market regain confidence in investing. The Securities Regulatory Commission softened its regulation on margin trading and set supervision measures on some accounts of exchange of stock index futures. The commission also put off the IPOs of 28 companies to reduce the supply. It also decided to inject capital to securities companies, which action is supported by the Central Bank, to enable them to purchase stocks directly on the markets and stabilize the markets. The Central Huijin Investment Ltd. revealed that the company had purchased ETF in the secondary market and 21 companies announced that they would purchase blue chips stocks with a total investment of more than 120 billion RMB. Besides that, 25 public fund foundations promised to purchase stock-leaning fund of themselves and some listed companies also decided to buy in their stocks. On July 8th, the Central Bank, the Ministry of Finance and State-owned Assets Supervision and Administration Commission (SASAC) announced that they would continue to take initiatives to save the stock market. But even after all these actions, the Chinese stock market is still stable. We believe that the stock price could still go down unless authorities put forward more powerful policies and actions to stop this vicious circle.

The index of Shanghai Exchanges dropped from 5178 on June 12th to 3373 on July 9th, (a decrease of 34.9%). Facing a tumbling stock market, the Ministry of Public Security publicly announced that the authorities would try everything they could to save the market. And on July 9th, vice-minister of the Ministry of Public Security, Meng Qingfeng, led teams to attend the Securities Regulation Commission’s meetings and cooperated with officials of the Commission to investigate on the deliberate massive selloff and the drop of index. After this incident, the index went up and remains rising.

The roller coaster of the stock markets is very harmful to the real economy. The violent crash after a sudden surge is particularly harmful. Also, this kind of financial market does no good to the internationalization of RMB. Without a stable market, RMB will have to handle the domestic obstacles first, let alone overseas powers.

 

[The article is published and edited with authorization from the author @He Jiangbing, please note source and hyperlink when reproduce.]

Translated by Garrett Lee (Senior Translator at ECHO), working for TMTpost.

转载请注明出处、作者和本文链接
声明:文章内容仅供参考、交流、学习、不构成投资建议。
想和千万钛媒体用户分享你的新奇观点和发现,点击这里投稿 。创业或融资寻求报道,点击这里

敬原创,有钛度,得赞赏

赞赏支持
发表评论
0 / 300

根据《网络安全法》实名制要求,请绑定手机号后发表评论

登录后输入评论内容
  • So richs try their ways to protect their money

    回复 2015.07.23 · via android
  • Not so much the devaluation of RMB as the publi's perception of currency devaluation .In daily life It's obviously

    回复 2015.07.23 · via android

快报

更多
100
6
95

扫描下载App