China's Financial System In One Picture

ZeroHedge breaks down China's stock market margin financing in The Complete Guide To China's CNY 4 Trillion Margin Doomsday Machine
An umbrella trust is set up like a CDO. The senior tranche is sold by banks to clients who receive a fixed payout (like a coupon payment), only instead of CDS premiums (in the case of a synthetic structure) or cash flows (from a cash structure), the ‘coupon’ payments are generated by equity investments in the subordinated tranches, which are used by brokerages to skirt margin restrictions. In other words, the guys holding the senior tranches are financing the stock trades of the guys in the junior tranches.
Trust products are also sometimes marketed in supermarkets, shopping centers and street corners to mom and pop savers, the very same group of people who are borrowing from these trusts to buy stocks.

The conclusion from BofAML:
The key risk to our view is that the government may be prepared to take on substantially all the leverage, in which case, we expect RMB or growth to come under pressure.

The Chinese stock market is a microcosm of the Chinese economy. What happened in the past year is the post-2008 period on fast forward. The stock market is far from the largest of China's problems—but maybe it is the straw that break the camel's back.

At the end of the day, there are only two ways to resolve massive credit inflation. One is deflation, punishing the incompetent more than the competent:
Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate...it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.
The second choice is to save the incompetent with currency devaluation, and punish the savers.

Currency devaluation is coming. Although it is the logical outcome of a massive credit inflation, "no one" expects a major devaluation in the yuan. Here are the geniuses at the Federal Reserve looking ahead 5-years:

No comments:

Post a Comment