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Wall Street Loves China's Capitalism

Updated on March 9, 2017

It seems like Wall Street loves Donald Trump. On Twitter, Trump keeps voicing his opinions of how great the stock market is doing. Of course at this point in time, Wall Street can't determine where the market is going. When you have nations like North Korea acting like a superpower and destabilizing Japan's resolve then markets enter a euphoric state characterized by high volatility.

Xi Jinping and Vladimir Putin are fully aware when you have a recalcitrant child with nuclear weapons that escalation and instability will drive superpowers to the brink of irritability and action. It seems like the markets aren't fully aware of geopolitical consequences eating away at consumer and corporate confidence therefore adversely impacting recovery.

However, of course China does have their own problems. The issue arises from "zombie companies" which need bailouts in order to operate, or are indebted companies that are able to repay interest on debt but not the principal. These companies place tremendous pressure on governmental subsidiaries and banks who provide life-support to these companies that otherwise wouldn't exist.

Another problem is that Chinese foreign exchange regulators and authorities discovered underground banks defrauding the state of 7.3 billion US dollars. One should ask how it's possible that an underground bank can legitimize itself without permission from state authorities. It seems like shadow banking is well entrenched in the makeup of China's financial system.

Again, Wall Street doesn't care. Remember, back in December 2016 when the Fed raised interest rates, the Chinese peasants decided to dump their shares and unfortunately the only buyers were the Chinese central command desperately trying to keep their stock market up. Wall Street knew the mechanisms and decided to cheer and short the Chinese ETF's in mass proportions.

The Chinese government loves money and economic statistics. It is within reason that the central government in China would do whatever it has to do to nudge economic statistics to benefit themselves. Who will argue? Wall Street? The International Monetary Fund (IMF)? Janet Yellen? Of course not, they all welcome it.

Wall Street has absolutely no problem with Chinese securities regulators banning shareholders with large stakes in listed firms from selling them. Perhaps the most daunting admission is how the real Wall Street and Chinese state authorities seem to be working together. One Chinese banking regulator stated, “We can now allow lenders to roll over loans backed by stocks.” The state-owned China Securities Finance Corporation Limited is the only institution to offer margin financing loans to brokerage firms. They have pledged 260 billion Yuan for 21 securities firms to purchase shares in the market.

This has given rise to hedge funds controlled by the US to actually stock up on Chinese securities during the selloff. They see an opportunity with state funds supporting share prices. The People’s Bank of China will now support liquidity for the China Securities Finance Corp to issue short-term bonds to replenish capital. The police have joined securities commissioners to identify possible leads on malicious short-selling. However, it was the Chinese government that opened the door for fund managers to legally lend shares for short-selling and expand numerous listed stocks to sell short.

Global investors were salivating when Chinese regulators opened up the market for short short-sellers. Many Chinese brokerage firms were happy that foreigners could participate with a clearly defined program of shorting Chinese capital markets. That means more commissions for them! At first there were some restrictions to shorting the Chinese market. Hong Kong Exchanges and Clearing Limited’s (SEHK) CEO Charles Li said that he was unsure of why no shares were shorted in the first week, but the exchange was not concerned.

One Wall Street anonymous official said, “Rules must be changed to allow real short-selling to take place.” Now we have Chinese state agencies telling state owned companies to not sell shares and instead buy more. In fact, they’ve increased the amount of allowable shares that a state company can buy from 5% to 10%. Sinopec Group, a state oil giant, bought 46 million of its Shanghai-listed shares and pledged to buy more within the next 12 months. They reiterated to Chinese retail investors that they will not sell their shares.

China Shenhua Energy Company has bought 8.02 million Shanghai-listed shares. The China Securities Regulatory Commission is precipitating a move of unprecedented manipulation to boost stock prices at a state level. What is unique and catastrophic is that Chinese banking regulators have also announced that they will allow banks to extend mortgage loans that use share funds as collateral. That means state officials want to draw more capital in the stock market. Tying mortgages with stock volatility is catastrophic for any economy to undertake. It is a complete transformation of mortgages based on wages, production, and growing the economy.

This further compounds the problem that state owned enterprise will one day unleash their shares to raise capital. The question begs in the minds of the Chinese investor, when will these corporate entities sell their shares? I want to ask Wall Street who has spent a couple of extra billion dollars if they know. China’s consumer price index, a main gage of inflation, edged up 1.4% in June. It was an economic statistic that Wall Street prayed and lobbied for.

Oil, iron, ore, and copper have tanked. This weakness indicates deflationary forces and a global economic slowdown moving forward. Wall Street’s and the government of China’s efforts to increase stock prices rest on one goal. It is a methodical economic circus to have retail investors run in buying shares like idiots while the astute market players exit from the back door. Wall Street and China still gamble on stupidity yet still love each other because they sleep in the same bed.

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