Saturday, July 11, 2015

China's Stock Market Losses Now Exceed Worst Month of 2008.

On June 12, 2015, China's total market capitalization hit ¥78.3 trillion.  Four weeks later, on July 10, the total had fallen to ¥51.2 trillion.  At an exchange rate of ¥6.2 to the U.S. dollar, that ¥27.1 trillion drop equates to $4.3 trillion in losses.

Back in January 2014, the financial press began to wonder if the impending default of the Credit Equals Gold No. 1 wealth management product, issued by the bank ICBC, would be China's "Lehman Moment."  The bailout of that financial product came and went, so the China Bears looked elsewhere.

The next glimmer of hopelessness came in March.  That was the month Chaori Solar became the first Chinese company to default on a domestic bond.  Instead of a Lehman Moment, Joseph Sternberg at the Wall Street Journal, argued that it was actually a Bear Stearns Moment with Chinese Characteristics.
The Bank of America economists who articulated the analogy describe the original Bear moment of 2007 as the time "when the market started to seriously reassess subprime debt risk." Put another way, the write-downs at the two hedge funds spurred market participants to rethink whether their assumptions about market conditions for housing and debt were still correct, and to start adjusting their behavior. ... What is happening as a result of Chaori's default is something different: Market participants are wondering whether their assumptions about government behavior have been correct. It's an important distinction.
The Chaori Solar default, as well as defaults for three other companies, came and went.  China's financial markets only seemed to gather momentum.

Finally, relief for the China Bears came.  Ben Bernanke, former Chairman of the Federal Reserve, made a statement during the World Business Forum in Hong Kong this June that "A Lehman Moment" is not likely.  That was less than two weeks before the peak.  His record on foreseeing economic catastrophes is Keynesian level, at best.

The United State's market capitalization before the Panic of '08 peaked out at $16.1 trillion in April 2007.  Lehman Brothers filed for bankruptcy on September 15, 2008.  At the end of September 2008, market capitalization stood at $13.5 trillion, down $2.6 trillion from the peak.  By the end of October, market capitalization had fallen another $3.2 trillion to $10.3 trillion, surpassing the value of all losses up to that point.  October was the month Alan Greenspan declared financial markets were experiencing "a once-in-a-century credit tsunami".

At $3.2 trillion, the worst month of the Panic of '08 was still only 75% of the losses that China's market capitalization just experienced.  China's market capitalization today is also much lower than the United State's was in 2008.  Could we be experiencing a once-in-a-China-Century credit tsunami?

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