China enters subprime territory


The Chinese stock market is heading into subprime territory.

As William Pesek at Bloomberg points out, the Chinese government is so desperate to keep stocks from crashing, that homes are now acceptable collateral for borrowing to buy more stocks. Here’s the logic behind the crazy idea: property is difficult to liquidate when assets crash.

As Pesek points, China is sowing the seeds of a time bomb to match its debt and stock bubbles..

“Tying the future of the nation’s housing sector to today’s stock mania is lunacy,’’ Pesek writes. “Why bother letting banks churn out subprime debt instruments, as Wall Street did in the 2000s, when you can turn your whole economy into one?”

The Chinese stock market is really a casino. David Barboza at the New York Times points out that millions of ordinary investors have borrowed money to invest in shares to get rich quick.

“They started to borrow money on margin to buy shares they couldn’t afford. They bet everything on the belief that this was a new era, gleefully believing stocks moved in only one direction,’’ Barboza writes.

“But there is a major difference between the markets in China and those in the other big economies like the United States. In China, mom-and-pop investors, rather than big institutions, make up the bulk of stock purchases. Such smaller players don’t necessarily have the resources to withstand the volatility.”

And so the market is now in freefall. Since mid-June, the indexes have lost around 30 per cent and 38 per cent, respectively burning up a combined $US3.2 trillion ($A4.27 trillion) in wealth. That’s twice the size of India’s stock market.

And millions of ordinary people are going to lose everything because the Chinese Government has mismanaged everything.


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