China Just Nationalized $6 Trillion of Stock Losses
China’s stock market had what traders call a “Dead Kitty” bounce on Thursday as the communist authorities dispatched police and security personnel to “encourage” insider-buying and to arrest short sellers. With the Chinese market still highly inflated even after falling $3 trillion in value, China took action last night to “nationalize” about $6 trillion in losses.
China is about to show its third straight quarter of negative real (after inflation) GDP growth. The nation had been relying on a stock market boom to play a “decisive role” in funding the nation’s “Silk Road” reforms to transition to a consumer economy.
But as Breitbart News warned in “China’s Lehman Brothers Weekend Begins,” the “Red Dragon” has suffered a financial collapse equivalent in degree to the U.S. stock crash in 2008-9. Unlike the U.S., which used a formal government bailout to stabilize markets, the Communist Party instructed the nation’s banks to use their own balance sheets to guarantee the current $8 trillion stated value of all of China’s 2800 listed stocks.
As Stratfor’s John Minnich points out, “market capitalization of Chinese stock markets hovered around $1 trillion to $2 trillion” before the recent stock boom. At its peak on June 12, “China’s stock market capitalization, all the markets across the country, was something in the area of $10 trillion to $11 trillion.”
Minnich comments that people before the boom might gamble some of their personal savings into the stock market, but “it wasn’t critical to financing, corporate financing in the Chinese economy. Almost all corporate finances came through the state-owned banks.”
But President Xi Jinping’s Silk Road reforms aimed to “privatize” the risks of financing state-owned-enterprises off of the balance sheets of state-owned-banks and onto the balance sheet of the public. Over the last two years, the number of Chinese stock brokerage accounts for small individual investors grew from 20 million to about 100 million as the markets boomed.
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