Saturday, July 7, 2018

China Threatened By "Vicious Circle Of Panic Selling" From Marketwide Margin Call

The pledging of shares as loan collateral - a practice that has gotten increasingly more popular over the years - has been especially prevalent among smaller companies.
The risk for other shareholders is that when major investors take out such share-backed loans is that stocks can plunge sharply when the borrowers run into trouble, and are forced to liquidate stocks to repay the loan. Hong Kong-listed China Huishan Dairy fell 85% in one day in March 2017: It is unclear what triggered the selloff in the first place, but the fact that Huishan’s chairman had pledged almost all of his majority shareholding in the company to creditors was likely a key factor.
The marketwide numbers are staggering: about $1 trillion worth of stocks listed in China's two main markets, Shanghai or Shenzhen, are being pledged as collateral for loans, according to data from the China Securities Depository and ChinaClear. More ominously, this trends has exploded in the past three years, and according to Bank of America, some 23% of all market positions were leveraged in some way by the end of last year in China, double from the start of 2015.
Shares pledged as collateral for loans account for ~10% of total A-share market cap, with 123 companies over 50% pledged, amounting to a combined pledged market cap of RMB1.0 trn, or 2% of total A-share market cap.
Furthermore, so far in 2018, there have been ~50 A-shares that have suffered price declines over 60%, with an average pledge ratio of 28%, thus likely falling below margin closeout level.
Should the Composite market slide another 100 or so points, taking out the critical support at 2,655, then regulators may finally be forced to tap banks and brokers on the shoulder, and demand companies repay loans. The resulting stock mass liquidation could also be the trigger Trump needs to demand capitulation from Beijing as part of the escalating trade war. The big question is, if indeed this is the endgame, whether China will allow this to happen without retaliation, or if Beijing - having little to lose - will sell a few hundred billion Treasurys to punish US capital markets as its own stock market crashes and burns.
As far as I'm concerned, let the Red Chinese sell their treasuries.  The market for those is huge, and while the financial pain they can inflict is going to hurt, it lasts only for a while, and once over, their leverage is gone.  


  1. CW, you just hit upon something that triggered a memory. Back in the
    80s, we were being told that the Japanese juggernaut would buy America.
    Their industries were so heavily subsidized by the Japanese government,
    their economy collapsed. They are still feeling the effects of their
    folly today!

    China today is like Japan in the late 20th Century. This lesson
    was not lost on Ronald Reagan or Donald Trump. China has a lot more
    to lose in a trade war against the United States, and they know it!
    (especially since Trump cut corporate taxes, regulations and income
    tax rates.) American industries are ramping up production as I type
    this post.

    We could collapse the Chi-Com economy so long as this trend continues!

  2. all well and good....remember who controls the regulators. the PLA has a lot of bullets and unusable inland beachfront property to dispose of the bodies. don't look forward to the chins shooting themselves in the foot so easily. Beijing wouldn't have gone this far out on the limb if they didn't have a rope around everyone's neck already....

  3. Counting down from 10...9...8...7................DJT goes for the throat with the trade tariffs and last, but not least, MARKET CALL !!

  4. This is a fine setup for those very liquid to raid the shares of those held on margin....all they have to do is short just enough to start a downtrend, and then start picking up stock at bargain prices on the panic the age of algorithms and computerized trading, it's happened more than once....``1`````````````````````````````````````````````