Someone screamed “fire” in a crowded theatre in Shanghai about a month ago. For whatever reason the audience was on edge. Perhaps they were watching a suspense thriller, or maybe a horror flick. We don’t know.
But we do know that all at once, a manic herd of panicked patrons all made a mad dash for the theatre exit. Then, however, something went terribly wrong. They couldn’t escape.
The hysterical masses piled up against the inwardly opening door. The force of the bodies made it impossible to egress. Pushing for the exit the patrons sealed their fate…they went up in flames, along with the building.
Fortunately, this grim theatre incident is merely a graphic yarn. There’s been no fire that we are aware of. No fatalities either. There have been casualties, though. Namely money…lots of it.
Anyone with even half their wits saw this money combustion coming from miles away. We could even see it from across the Pacific. Now, we can hardly believe it is happening…
Shanghai Stocks Going Up In Smoke
The Shanghai Composite Index is going up in smoke. On June 5, the broad Chinese index was at 5,023. This week it fell below 3,500. That’s a decline of over 30 percent in one month’s time.
In addition to a crashing stock market, roughly $4 trillion dollars of implied wealth has gone up in smoke over the last three weeks. No doubt, that’s a lot of money. Where did it come from? Whence did it go?
One report we came across said the $4 trillion went to market heaven. However, given that it was faux wealth to begin with, conjured up by the People’s Bank of China, we believe it went somewhere else. More accurately, that it went to market hell…with the hopes and dreams of the People.
Obviously, the rapid disappearance of stock values has businesses in disarray. “About 45 percent of China’s listed companies are suspended,” reported Bloomberg, “leading traders to sell what they can.
To make matters worse, government officials are on the case. They’re doing their part to resist natural market forces, which are only working to correct the asset price distortions created by insane monetary policies of mass credit creation. To get in the way, they’re banning the free buying and selling of stocks, and free press.
The Ghost of Mao Zedong
For instance, short selling has been banned and China’s social security system has been banned from selling stocks. In addition, Chinese media has been banned from saying “equity disaster” or “rescue the market” in its reporting. Naturally, these restrictions are only making matters worse.
‘“The index futures exchange CFFEX caps the daily limit of one-way new positions to 1,200 lots for the mid/small-cap CSI500 index, and raised the margin requirement to 30 percent from 10 percent for non-hedging short positions. These moves may have pushed back some speculative shorts but may have promoted more selling pressure in the cash market as institutions cannot properly hedge their longs,’ writes Deutsche Bank AG analyst Yuliang Chang.
“While this is just one example, it highlights to broader problem of unintended consequences when setting new rules fast and loose. An institutional investor that might be willing to hedge its position and ride out the correction isn’t able to. With trading halted on so many stocks and the rest hitting the 10 percent cap day after day, anyone that doesn’t want to get stuck will frantically start selling again tomorrow. It’s ironic, but policies meant to stabilize the market may just be driving people toward the door.”
So when policies restricting free sale of stocks didn’t work, the government went all in. On Thursday and Friday in China, stocks jumped. But this isn’t something to cheer…unless you like to cheer for lies.
“Funds from the People’s Bank of China are being used directly to purchase stocks, in what appears to be a desperate attempt to stem the turmoil in markets,” reported the Financial Times. “The confirmation comes from the China Securities Regulatory Commission.”
Mao Zedong, the Chinese Communist revolutionary and founding father of the People’s Republic of China, must be grinning in his grave. His ghost just made an epic heist.
for Economic Prism