Do Not Fight against Rich and Powerful Government in Stock Market 2Posted: August 26, 2015
On July 29, I had a post titled “Do Not Fight against Rich and Powerful Government in Stock Market”, giving the advice that selling short against rich and powerful Chinese government’s efforts to stabilize the Chinese stock market is doomed to failure.
I cited the incident of Hong Kong government defeating international speculators’ attack at Hong Kong stock market during the Asian financial crisis. Hong Kong government made huge profit from its intervention of the stock market.
Now, the history is repeating. Speculators are attacking Chinese stock market against Chinese government’s efforts to stabilize the market.
The problems for the speculators are:
First, the Chinese government has the best sources of information about the market so that it knows what level to buy with certain profits.
Second, it has much more the financial ammunition for the battle. Speculators have limited supply of shares for selling short as the number of shares in the market is limited. The government, however, has the power to forbid large shareholders’ sales of their shareholding; therefore, the speculators have limited ammunition.
The government, on the other hand, has unlimited ammunition. First, it can increase money supply to such an extent as to enable it to buy the entire market. As a result, there will be no supply of shares for speculators to sell!
Do not forget, Chinese currency is printed and issued by the Chinese government. Oversupply of Chinese currency will cause the exchange rate of the Chinese currency to fall, which is precisely what the Chinese government wants to support its economy and increase export. The Chinese government is killing two birds by one stone in doing so.
True enough, the Chinese government reduced interest rate and relaxed reserve requirements yesterday to increase money supply. There will be more money and less shares to buy!
Third, the government can change the rules while the speculators cannot. It can punish short sellers. Chinese law enables the government to imprison short selling speculators for the crime of disrupting the market. As for foreign investors, there are rules to restrict their sales of shares. China can tighten the rules while the speculators can do nothing but crying foul.
The last but the most important: This is more a political than economic move aimed at winning popularity among the vast number of Chinese retail investors. It is what the Chinese government must do and must not fail!
Article by Chan Kai Yee as comments on Reuters’ report “China cuts rates, relaxes RRR”
The following is the full text of Reuters’ report:
China cuts rates, relaxes RRR
Tue Aug 25, 2015 8:12am EDT
China’s central bank cut interest rates and relaxed reserve requirements for the second time in two months on Tuesday, cranking up support for a stuttering economy and a plunging stock market that has sent shockwaves around the globe.
ZHOU HAO, SENIOR ECONOMIST, COMMERZBANK, SINGAPORE:
“This move makes sense from economics point of view. The real interest rates have stayed above double-digit for a few quarters, suggesting that the policy rates should be lowered aggressively. The market liquidity conditions have tightened significantly since the “one-off devaluation”, as PBoC bought CNY against USD to stabilize the exchange rate. In fact, we have seen that the agent banks stepped into the offshore market this afternoon to offer liquidity.
“However, the side effect of monetary easing is the depreciation pressure on CNY and the potential capital outflows. In fact, the question remains whether China wants to see more currency depreciation.”
LIU LI-GANG, CHINA ECONOMIST, ANZ, HONG KONG:
“This is within our market expectations, the only small added is the interest rate cut, including the lower lending rate and deposit rate. The 50 basis point RRR cut is more important. This will inject 650 billion renminbi ($101.38 billion), a huge amount. This will ease hard landing concerns.
“We should see some rebound in September or October and growth should rebound in the fourth quarter … The Caixin PMI data was very weak and we expect the official PMI to also be quite weak. Although this has some elements of giving comfort to the market, this is more about giving a real boost to the real economy so the government can continue to have its 7 percent growth rate fulfilled – although I don’t think that’s possible. But in the second half of the year, if they don’t have very disappointing growth, they may get closer (to the target).”
PHILIP SHAW, CHIEF ECONOMIST, INVESTEC, LONDON:
“The measures will certainly stabilise sentiment in the short term. “(But in the longer term) it’s debatable whether the moves in monetary policy can stabilise equity markets. One hopes the easing in monetary policy would help the economy.”
ANALYSTS AT JPMORGAN
“China’s decision to cut reserve requirements by 50 bp will be regarded by many investors as overdue, but nevertheless reassuring. It was the failure of the authorities to act over the weekend that seemed to spook markets yesterday as it strengthened the impression that Chinese policymakers were starting to rely more heavily on the exchange rate as a way of stimulating demand as opposed to taking additional domestic policy measures.
“Today’s decision helps to correct this impression, and is naturally relieving some of the strain on highly stressed trade partners and commodity exporters. The litmus test will come overnight, however, and the efficacy of the RRR cut in boosting the domestic stock market. For now, though, expect to see a further, albeit by no means complete, reversal of yesterday’s moves (i.e. EUR and JPY lower, the dollar, commodity and EM FX higher).”
WEI YAO, CHINA ECONOMIST, SOCIETE GENERALE, PARIS:
“The PBOC is doing what it has to do, but it is very likely it is not enough so more will have to be done. The cut in the reserves rate (RRR), that was well expected, so no surprise at all and we have to remember that cutting RRR right now is not easing. It is just preventing a tightening.
“The interest rate cut is a bit of a surprise, but the signal of easing is offset a bit by the recent liberalisation of the deposit rate.”
KALLUM PICKERING, SENIOR ECONOMIST, BERENBERG
“Will it be enough? It’s difficult to say – it’s not a huge rate cut but it does show markets that they are willing to act in order to arrest any slowdowns. It has proved to markets that China is willing to act. Investors have been waiting for them to act and they have.
“Is this sufficient? It might not be, but it does set a precedent that they are engaged and looking to prevent any further declines. The key point to make with China is that it does have considerable policy levers if necessary – the interest rate is not low by global standards and they can always rely on their more traditional policy tools such as public investments if it’s a slowdown in the economy that is taking place.”
MARK WILLIAMS, ECONOMIST, CAPITAL ECONOMICS, LONDON:
“It might suggest there’s a change of tack now from directly trying to shore up the equity market to trying to limit downside risks facing the economy.
“We’ve seen over the past couple of days that the so-called ‘national team’ hasn’t stepped in to stop the equity market from falling, so perhaps they have realized the futility of trying to prop up prices through direct purchases and it makes sense to concentrate on the macro repercussions.
“It may help shore up equity prices but I don’t think we’re going to get a big rebound. I think that too many investors in China have been burned badly from what we’ve seen over the past few weeks and won’t be too eager to step back in.”
NIE WEN, ANALYST, HWABAO TRUST, SHANGHAI:
“I think the cut of RRR and interest rates is mainly aimed at supporting the stock market, as well as to ease capital outflows following yuan depreciation. It will offer a buffer to the tumbling stock market, but isn’t likely to have material support.
“The deposit rate cut is out of our expectation given CPI will soon exceed 2 percent, which will push the real interest rate into a negative territory. There’s little room to further cut benchmark rates in the coming few years as negative rates will hurt the economy and financial markets.”
ANDREW POLK, RESIDENT ECONOMIST, CONFERENCE BOARD, BEIJING:
“That’s quite a move. Seems like everything but the kitchen sink. Clearly the timing is all about the double-whammy of the stock market and downward pressure on the currency, both of which I’d argue they brought on themselves. They stood back and watched while the stock market ran up, then had a ham-fisted response when it fell, that created the need for a correction but made it more difficult to react … The RRR cut buys them some time as far as having to allow the currency to depreciate, because defending the exchange rate and providing liquidity are at odds with each other.”
(Reporting by Pete Sweeney, Marc Jones, John Geddie, Jake Spring, Marius Zaharia and Sudip Kar-Gupta Compiled by Ian Geoghegan)