China’s stock market falling off a cliff: Why, and why care? | Alicia García-Herrero at

Great insight from Alicia García-Herrero:

….The need for Chinese corporations and banks to avail themselves of fresh equity cannot be underestimated. On the one hand, corporate debt has grown sixfold from 2005 levels. On the other hand, Chinese banks are not only heavily exposed to these corporates, being still their main source of financing, but also to local governments whose huge borrowing from banks is starting to be restructured. To make a long story short, China’s governments needed a bull stock market to transfer part of the cost of cleaning up its corporates’ and banks’ balance sheets from the state to private investors, including foreigners. The PBoC danced to the Government’s tune, easing monetary policy since November last year. This was done through several interest rate cuts and by lowering the liquidity ratio requirements. The problem with all of this liquidity is that it only fueled additional leveraging, including for gambling on the stock market…..

The sudden collapse of the Chinese stock market had two triggers. First, the was a wave of profit taking after the Shanghai benchmark index broke through 5 000 in early June and doubts emerged about further easing from the PBoC. At that very same moment, China’s securities regulator announced measures to cool down the market, which amounted to banning brokerage firms from providing unregulated margin funding to investors. This was more of a shock to the system than one might imagine, as margin financing in China is much larger than in other stock markets.

Japan had zombie banks, looks like China could end up with a zombie stock market.

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2 Replies to “China’s stock market falling off a cliff: Why, and why care? | Alicia García-Herrero at”

  1. China has been a illusion for many,many years…it is no surprise to see cracks appear in it’s fake economy,I’m surprised it’s taken this long..the question will the communist (capitalists whanabes) engineer a full blown banking crisis in China ? That will be interesting to watch.

    1. To Jay Towner:
      China’s economy is not fake …”.Made in China “is real and will be here until the world ends. I f you don’t realize that, you don’t understand basic economics

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