Call Options: Beijingers "trading" sons and daughters for marriage (Temple of the Earth Park, on a Sunday in 2014)
China runs its largest casino not in Macao, but at the Shanghai Stock Exchange. In about the last month the CSI 300 Index dropped around 1500 index points. It is still 80 % higher than same time last year. It is estimated that 85 % of the money in the Chinese Stock Market, is not form institutional investors, but from the retail market. Now, who cares when gamblers in a Casino loose money? Normally only the gamblers (and the casino is happy). As this is mostly secondary market, the impact on companies which are not just now raising capital by issuing shares, is nearly non. Looking at the numbers, this merely looks like a downward "correction" of an overheated retail market. No "crash". It's a looping. There is a lot of shrieking, but it won't hit the ground. That's the fun of it. Otherwise its a tragedy.
The Chinese Government did everything last week to support the stock market. And first it does not appear obvious why. IPOs were suspended! Sounds like a serious measure? Why should anybody, who is sane, go for an IPO in such a market downturn? Further measures were not just the drop of interest rate by the central bank, but also the "instruction" for state owned companies to keep their stocks, or even to buy. It went so far that even Social Security Funds claimed not to sell, which should not make a big impact, as most of their portfolio is not in stocks anyways - I hope. All these claims, had the purpose to look invincible, but also caused quite some panic, because it put the focus on the "seriousness" of what is happening. Not clear to me why the Chinese government's intervention was verbally so heavy. Perhaps to show support to the "common people" who now maybe loosing a lot of money. "Harmony", social stability, are terms which are very high up on the agenda. And loosing lifetime savings, does not help harmony too much. But what can you do, when people put all they have into a risky gamble? It is very clear that the Chinese stock market is pretty detached from fundamentals, and as long as these kind of trades take place, it will be hard for any government to protect people form their own foolishness. The bad news is, that this money which is now burned, could have well been used in real investments, or even just consumption, and not speculation. On the other hand the Chinese stock market is an excellent tool to take money out of the system, which has been pumped into it before.
The stock market is a boring topic, and I promise not to comment on it too frequently. In China it is though, quite a form of entertainment. Like the horse races. Just not that stylish. The easiness with which top managers, often drunk, spread insider information at the dinner table, and people immediately act on this with their smart phones, is quite exceptional. I mean, that's as illegal in China, like anywhere else. But nobody cares. Buy on rumor, sell on facts? There are just rumors to buy and to sell on. So, just listen to the drunk guy and spread his wisdom on WeChat. Then it becomes some form of truth. And even when there are facts, not many understand them anyways. One thing is right about that: facts don't matter very much. That's even quite good. Because the fundamentals of many Chinese enterprises are pretty bad. But that's another topic, much less entertaining than the stock market. Though much more serious. And changing that, is much more interesting.