2015 | 2016 | ||||||
Price: | 204.90 | EPS | 0 | 0 | |||
Shares Out. (in M): | 851 | P/E | 0 | 0 | |||
Market Cap (in $M): | 168,360 | P/FCF | 0 | 0 | |||
Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
TEV (in $M): | 0 | TEV/EBIT | 0 | 0 | |||
Borrow Cost: | General Collateral |
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Policy Blunders in China Likely Sink Global Markets Because Everyone is Banned to Sell
Before I go any further, I want everyone to know I'm sharing a view that I feel incredibly strong about and believe it to be right. Global investors thus far have largely paid attention squarely on what is happening in Greece ( shown by looking at most read articles on Bloomberg terminal) and China appears to be a side show with the gambling A share market crumbling that no one paid attention on the way up. Many strategists and economists have offered views that largely along the lines of government's ability to contain crisis and coupled with indices there rebounding nicely, people appear to believe the crisis is averted. I'm presenting a thesis here, supported with arguments, that the recent policies containing the rout in China will create acute and likely uncontainable economic problems which will undoubtedly spread to global markets and causing a big crisis if those policies are not reversed very quickly. This is the first time in my investing career that I ever had a view about market direction.
China's stock value decline is not the problem, its crisis containing measures are. The rapid fire policy decisions made at the very top of the communist government show a blatant lack of understanding about market functions and will cause an acute liquidity crunch in the real economy with few remedies. In fact, the higher the stock index level goes in Shanghai, the worse the situation is, creating an incredible shorting opportunity in gloabl risky assets.
Many media outlets/analysts/ strategists and talking heads have largely equated the most recent government intervention as a form of QE similar to those launched by the Fed and ECB. Those individuals failed to understand the real policy implications of China's market saving strategy. In fact, the Chinese style market rescue is locking down massive liquidity in an unprecedented fashion from the real economy. This is an issue that western investors have never experienced or have an understanding of. Government is applying brute force/power of state to prevent all selling, large investors and small investors alike. Two measures: 1. the stock halt of half of the listed companies that is ongoing among Chinese stocks 2. the recent measure of banning directors, company and any 5%+ owners from selling shares. In the history of stock investing, there has never been a market rescue measure that involved banning sellers, hence I don't believe the consequences of that policy is well understood by the policymaker in China or the general investing public in the U.S. But the end result is plain and simple, a lock down of liquidity. If no sellers are allowed to sell, the market loses its function and loses its ability to transmit liquidity. The Chinese central bank reportedly drew a blank check supporting the market, but different from the check drew by ECB and the Fed, the sellers have no ability to access it because it is illegal for them to sell. An acute liquidity crunch is imminent in the Chinese real economy due to investing capital not being able to be deployed as they are locked in the stock market by party decree.
Here's a simple example, if you have 100 million RMB invested in a 2 billion RMB company in the stock market in China and you come across an extremely appealing investment opportunity requiring you to allocate 5 million RMB of investment capital, you simply have to forgo that project due to the illegality of selling 5 million dollar worth of your investment holdings in the public markets. Imagine this going on on a much much larger scale. Listed companies have to buy back its own shares with cash, forgoing investment projects. SOEs putting funds to support the stock market etc. The CPC created a very unique Chinese market where investors are not allowed to sell and only allowed to buy. This quickly suck up liquidity in the real economy and then also bans sufficient capital from leaving due to restrictive measures put in place to prevent selling. Recent round of media propaganda painted selling as unpatriotic. Despite the absurdity of how it sounds, if you have an understanding of how the Chinese government, busienss work, you will know that people are trained to respect the party's wish and often they put that ahead of economic interests for long term benefits. Unfortunately, this party wish is sucking liqudity out of the real economy. On the side of small investors, large amount of liquidity are simply trapped in stocks that are halted. Companies have halted their stocks in mass to avoid a turbulent market and stock price declines. Which caused worse declines when mutual fund redemption came in. Those are all containable crisis should the government simply put a large enough check to buy the market but the rush of the policy making, the party also decided to ban sellers, not shortsellers, real sellers. It should come as no surprise that Shanghai and Shenzhen markets are soaring when you mostly ban selling. Yet the higher the market goes, the more liquidity it gets sucked in. As we know, market support policies are easy to put in, very hard to remove. Investors become addicted to those policies. Locking up liquidity makes matter worse because when they are allowed to sell, they tend to sell in mass creating a run. Think a bank that is closed, then all of a sudden open it. Everyone would want to get their money so it won't close tomorrow. The unintended consequences of these policies will create a likely severe liquidity crunch in the Chinese economy causing investment to drop and GDP growth to slow down. The higher the index goes, the worse it is for the actual economy. I think data will come fairly quickly that investment activity is falling off a cliff as a result of the selling restrictions that are placed in the market. But by then, it is very likely to have translated into a real economic problem and it would be nearly impossible to exit without creating a panic. Poorly crafted policies are the worst; they are hard to reverse.
The catalyst is pretty clearly outlined in the post.
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