Communists. From China Daily:
Recent overweighting to stem A-share plunge has made China Securities Finance Corp(CSF), central bank-backed refinancing institution, among top 10 shareholders of many listed-firms, reported Securities Times on Wednesday.
Among all investments, eight firms have been confirmed of the CSF’s stake, which includeproperty developer Dulexe Family, Hualan Biological Engineering, resource purifyingdeveloper SJ Environment Protection, Yunnan Tin Company Group, Fujian CosunterPharmaceutical Co, Hunan Er-Kang Pharmaceutical Co, digital map provider NavInfo Co, andretailer Friendship&Apollo.
The CSF has been listed as the second-largest holder of tradable shares at CosunterPharmaceutical, third largest at SJ Environment Protection, and fifth-largest shareholders atYunnan Tin Company, according to the Times citing disclosures to Shanghai and Shenzhenstock exchanges.
Some listed companies dismissed the disclosing request for regulatory reasons, said thenewspaper.
Christopher Balding captures the outcome:
First, given the near complete policy against selling stocks for brokers, insiders, key stakeholders, asset managers, and others which comprise a large portion of recent buying, how can these firms sell without pushing the market down? This policy is essentially locking up a large amount of stock market and financial liquidity which does push the price higher, but also creates the problem of what happens when firms want or need to sell. Market volatility in China and the relatively low level of free float implies that large institutional sellers exert enormous downward price pressure. While the price problem has been stopped in the short term, it has created the problem of unraveling this buying spree by an institution that moved the market.
Second, given the rapid rise in associated debt with the stock market, especially with firms who became dependent on the stock market for profit growth, what happens to this debt given the near criminal prohibition on selling? Given the near perfect correlation between margin debt and the stock market, the debt can only be reduced by selling stock to pay of the debt. However, selling puts downward pressure on the price. Additionally, the interest rates on margin loans are relatively high by some accounts approximately 20% for retail investors though likely significantly lower for large companies and SOE’s. Unless Beijing opts to simply freeze debt and roll it over indefinitely, to avoid having to sell stock pushing the market down which it has done to some degree, that debt is going to remain in a state of suspended animation.
Third, given the policy freeze on sell side liquidity and the encouragement to tie up bank and financial liquidity it stock based lending, how can liquidity be increased without prompting a decline in multiple asset classes? The entire China economic growth story is built on selective liquidity restrictions to achieve political objectives. Banks are built upon restricting lending to small and medium size enterprise for the benefit of large SOE’s. A large percentage of the stock market is essentially frozen for fear of collateral calls on debt and jail terms. Encouraging banks to pump liquidity into the stock market via various loan mechanisms to buy stocks they cannot sell, already an incredibly risky gambit, saps liquidity from the provincial bond market bailout which is supposed to increased to an eye catching 3.6t rmb. As all current liquidity is coming from the government and government mandates, loosening liquidity requirements run the very real risk of challenging many markets.
Fourth, as the public buying is an attempt to restore market confidence and bring investors back, what happens if hoped for non-public euphoric buying fails to materialize? Capital is flowing out of China at an unprecedented rate and foreign investors want nothing to do with the Beijing sponsored casino. This will require enormous public capital to even sustain the market lacking large inflows of private capital much less push it to pre-fall highs. It is questionable whether even Beijing has the willingness to act as the buyer of last resort at specified prices in the stock market. While Beijing has arrested the decline in the stock market, there is little evidence Beijing has thought through how to extricate itself from this morass.
The China Securities Finance Corp with the eye catching 3 trillion RMB purchasing facility will likely stabilize the market but then what? There is no evidence that firms or individuals unrelated to the Chinese government are piling back into the market to drive up prices. All upwards pricing pressure on stocks is coming from public or quasi-public funds. Even recently, CSF and related entities had to announce they had no exit plan for fear of prompting a market collapse.
There is currently no stock market right in China, there is government mandated price level in stocks. While that may stabilize the price level in stocks, as the only real market participant Beijing got its wish but now needs to figure out how to extricate itself from a mess of its own making, and keep the market buoyant. Any hint of public selling will incur enormous losses for Beijing and the state owned banks that bailed out the market. Beijing needs to sell off its purchases but right now it’s the only player in the market forcing it to negotiate with itself.
Destroyed in order to save it.
