The paper tiger is spiking the punch bowl again, turning responsible citizens into out-of-control and rambunctious speculators as it did a few years ago. In a desperate attempt to jumpstart the stock market, the Chinese government is using propaganda to convince the innocent public, from grannies to little Jimmy, to buy stocks. The red dragon does not believe immense fiscal and monetary interventions are enough to lift the economy from the pits of the Coronavirus pandemic. President Xi Jinping and his merry band of Communists are now using the tools of state-owned media to blow bubbles in the equities arena, and the population has fallen for this mendacity and deception. The U.S. may have the Federal Reserve to boost financial markets, but Beijing has both the People's Bank of China (PBoC) and the propaganda machine to pump stocks that should have been dead and buried.
The Bubble-Crash: A Brief History
In April 2015, People's Daily, a publication owned and operated by the Chinese Communist Party, published bullish propaganda about how the Shanghai Composite Index was about to embark upon a historic run. The government mouthpiece predicted that a new bull market in the benchmark stock index was "just beginning."
Beijing's mass manipulation campaign was successful. Within weeks, several million brokerage trading accounts were opened, and all types of investors jumped into risky bets. The leading index skyrocketed approximately 30% to an all-time high of 5,209. A new era of prosperity had arrived. The state told the truth! Everyone was going to get rich!
As Alvy Singer says in Annie Hall: "If life were only like that." It was days of wine and roses for only a couple of months. By February 2016, the Shanghai Composite cratered 89% to below 2,800. It continued to slide in the following years, bottoming out at 2,490.
A new study conducted by VoxChina examined the details of the bubble market, and it unsurprisingly found that investors trading on margin – traders buying stocks with borrowed cash – were the biggest reasons for the spike. Retail investors accounted for 85% of the boom, while the wealthiest institutional investors made up just 0.5%. But here is the gripping conclusion: Soon after the peak, the rich made a quick exit from the market and sold their shares to smaller households and corporations.
This resulted in a massive transfer of wealth. The bottom 85% of households lost approximately $36 billion, while the top 0.5% gained roughly $40 billion during the 18-month boom-and-bust period. Are we in for a repeat? The index had rebounded, especially over the last week, when it added $1 trillion in value. You can thank Beijing's second propaganda putsch for the rally.
Déjà Vu All Over Again
The Chinese Securities Journal recently penned a front-page editorial that encouraged everyone to get ready for another bull market. The message was heard loud and clear as the Shanghai Composite Index surged 11% in just one week of trading. The CSI 300, which consists of Shanghai and Shenzhen stocks, ballooned 8%. The Hang Seng Index advanced about 2%. Melt Up Monday was a carbon copy of what occurred in 2015.
But could this bubble-crash run survive 18 months? The leading indexes slipped to close out the trading week, and some new numbers could shed light as to why.
According to Bloomberg, two massive government-owned funds announced their intentions to reduce their holdings in stocks that had surged since the propaganda material was released. The National Council for Social Security Fund, the nation's pension fund, plans to sell $314 billion in assets. The National Integrated Circuit Industry Investment Fund Co. says it will trim its holdings in three companies (Wuxi Taiji Industry Co., Shenzhen Goodix Technology Co., and Beijing BDStar Navigation Co.).
It should also be pointed out that foreign-based funds dumped $630 million in Chinese shares for the first time since late March.
Does the smart money know something the rest of the mom-and-pop investors do not? But retail investors seem unfazed by the dip as one armchair trader used the drop to load up on more shares, telling the business news network: "It's still just the middle of the rally."
Fool Me Once?
In the aftermath of the COVID-19 public health crisis, China's economic reset appears to be booming. The latest manufacturing and non-manufacturing readings have finally returned to expansion, while credit markets are functioning as intended thanks to a highly accommodative central bank. Officials are now aiming at the stock market, potentially trying to make the well-connected Communist allies wealthier. Perhaps the manipulation, distortion, and intervention tactics are not working this time. As former President George W. Bush would say, "Fool me once, shame on you. You fool me you can't get fooled again." Or maybe the red dragon is out of fumes, allowing the power players to prematurely take the profits and leaving the grannies to pay the bill.
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Read more from Andrew Moran.
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