China Blues

I do love reading Zero Hedge. It is based in Eastern Europe, and often comes across as a Russian propaganda machine, but it also covers issues that are left virtually unmentioned in the West's subservient, corporate press. Warning....do not read the comments section for any report on Zero Hedge....the comments are often borderline insane.

Here is something stunning about China.

https://www.zerohedge.com/news/2018-06-24/china-cuts-reserve-ratio-unlocks-700bn-yuan-amid-rising-trade-war-mass-defaults-and

The Chinese are relaxing bank reserve ratios, ostensibly in response to the widening trade war with the USA.

Some quotes.

"The move is expected to unlock 700 billion yuan ($108 billion) in liquidity amid growing trade war tensions, a sharp slowdown in the Chinese economy, a tumbling stock market, rising forced margin call, and a spike in corporate defaults."

Get it? 

Their economy may be tanking, and the Chinese response is to start to reduce bank reserve ratios which just happen to be the most important protections put in place to safeguard the integrity of a banking system in just such a crisis! This is a policy change that only the absolutely desperate would make.

More. The Shanghai Composite Index - China's stock market - has dropped below 3,000 for the first time in two years. 

"The risk here, however, is not just to China's wealth effect, but to a wave of margin calls resulting in forced selling of stocks pledged as collateral for loans. About $1 trillion worth of stocks listed in Shanghai or Shenzhen, China’s two main market, are being pledged as collateral for loans, according to data from the China Securities Depository and Clearing Corp., or ChinaClear. The staggering number is equivalent to about 12% of the market."

I would suggest that this much equity would be pledged by companies as collateral only if they have absolutely nothing else to pledge - no hard assets or physical plant; no production streams; nothing in the bank; no accounts receivable; no intellectual property. It is as if these companies are a massive pyramid-like gamble, that works like this...

...borrowed money is used to pump a stock's price, which must be pumped higher and higher or that very same borrowed money has to be paid back in the form of the sale of the very stocks that had their prices pumped up in the first place! 

Doing this on the scale of a trillion dollars makes a mockery of any stock market. Small investors are left massively vulnerable to the machinations of company managers and lenders who may treat their investments as play things at at the playground of relentless corruption and malfeasance.  

So, who is going to get paid if these margin calls go ahead? Not small investors, who may be about to get creamed on a colossal scale. A massive decline in the Chinese stock market would reverberate worldwide. 

If you want to short the Shanghai, look here... 

http://etfdb.com/themes/inverse-short-china-etfs/

Do your own due diligence.

Query....what would the Chinese leadership due in the face of wide-spread unrest stemming from a collapsing stock market?  

Nothing good.