World Economy

China Banks Commit $200b to Stem Market Selloff

China Banks Commit $200b to Stem Market SelloffChina Banks Commit $200b to Stem Market Selloff

The extent of the massive government intervention to halt the plunge in the Chinese stock market was revealed last week by figures showing that major state-owned banks have made available more than $200 billion to boost share prices.

The intervention, organized through the Chinese Securities Finance Corporation, has halted the share market plunge that saw the Shanghai Composite Index lose 30% in the period June 12 to July 9, wiping out more than $3 trillion from Chinese share market capitalizations. Markets have since rebounded, rising by 17% in the past two weeks. But whether the recovery is sustainable is another question, WSWS reported.

The massive bank intervention was one of a series of measures initiated by the government and financial authorities to halt the plunge that was threatening economic and political stability. Other measures included: the withdrawal of major companies from share trading; police investigations of “malicious” short selling; and restrictions on the ability of company executives and CEOs to trade in shares. Some 17% of listed companies still have share trading activities suspended.

The bank intervention was carried out via two channels. Money was provided to the CSFC to lend to share brokerages and sustain their liquidity and to directly purchase mutual funds.

The Chinese finance magazine Caijing reported that the country’s five largest banks were directly involved, each providing 100 billion renminbi and that 17 banks participated in total, providing loans worth 1.3 trillion renminbi.

While the intervention appears to have halted the market slide, at least for the present, there are concerns over what it indicates not only for the Chinese market but for the global financial system as well.

Debt Defaults

Last week Standard & Poors warned of an increasing prospect of debt defaults in China and in the US junk bond market. It said these threats represented an “inflexion” point in the financial cycle. The Chinese corporate debt market is equivalent to 160% of the country’s gross domestic product.

According to S&P, companies will need to sell around $57 trillion of debt over the next four years, with 40% coming from China and 20% from US markets. The credit rating agency said it expected that the rate of debt defaults will accelerate in the coming period.

S&P analyst Jayan Dhru told the Financial Times: “Rapid debt growth, opacity of risk and pricing [due to the involvement of banks in the market], very high debt to GDP, and the moral hazard risk of the Chinese market make it a high risk to credit.”

Moral hazard refers to the assumption by investors and speculators that financial authorities, governments and central banks stand behind the market and will intervene to prevent a collapse, encouraging them to take on ever-riskier investments in the search for higher yields.

The S&P analysis pointed to the risks posed to markets by the rise of financial parasitism. It said four out of five new US debt issuers from 2012 to 2014 were B-rated companies, issuing higher yielding junk bonds. These securities have increasingly been used to finance share buybacks and for what it called “less productive investment,” rather than for spending on capital equipment to expand productive activity.

These speculative ventures have been fuelled by the near-zero interest rate regime set in place by the US Federal Reserve and other major central banks and could be at risk if the Fed moves to increase its base interest rate, even by a relatively small amount.