- “Risk of Collapse” and “Panic” in the Air, China Cuts Rates
by Wolf Richter, http://wolfstreet.com/
It didn’t take long: the frazzled People’s Bank of China tries to put a stop to the worst 2-week crash since 1996. The whole world piled into what had been the hottest stock market in the universe. Chinese stocks had been endlessly hyped in the US and elsewhere. For the smart money, it was a game of chicken; ride it up and get out just before the crash.
Chinese stock markets had more than doubled in 12 months, propelled also by margin debt, cheap credit all around, and the irresistible desire to get rich quick. Everyone in China, from street vendors to housewives, suddenly opened margin accounts in Hong Kong and mainland China, and borrowed money to buy stocks. Outstanding margin debt ballooned to $348 billion, even while insiders were reportedly dumping stocks. A well-oiled wealth-transfer machine.
It was one heck of a party. By early June, it had created $6.5 trillion in “value” over a period of 12 months; 63% of China’s 2014 GDP! The Chinese government continued to aid and abet that wealth transfer by touting stocks. Even in March, as stocks had already reached dizzying heights, a spokesman for the China Securities Regulatory Commission said that the soaring valuation for Shanghai-listed shares had its own “inevitability and rationality,” such as China’s “improving economic conditions.”
Then someone accidentally turned off the juice. Over the last ten trading days, the Shanghai Composite Index has plunged 19%, including 7.4% on Friday – the steepest two-week plunge since December 1996. The Shenzhen Composite has given up 20%, and the startup-focused ChiNext Index has plummeted 27% over the last three weeks, including 8.9% on Friday. According to Bloomberg, by Thursday, margin debt has dropped four days in a row. Markets were running out of propellant.
And on Saturday, the People’s Bank of China tried to put a stop to it. It cut its benchmark interest rates by 25 basis points, to 4.85% for the one-year lending rate and to 2% for the one-year bank deposit rate. The fourth cut since November. The last cut on May 10 had stemmed a much smaller rout and had re-ignited the propellants to drive stocks to greater highs. But the descent since has been brutal.