Following a characteristically silly domestic media blitz aimed at calming frayed investor nerves, Beijing dialed up the banks on Wednesday evening.
According to the ubiquitous people familiar with the matter who spoke to Bloomberg, Fang Xinghai, Vice Chairman of the China Securities Regulatory Commission, convened a call with “major investment banks” to help assuage worries around the EdTech crackdown, which some fear may presage additional “anti-capital” measures.
Restrictions on the private education sector, a $100 billion industry, were draconian even by Beijing’s standards. When taken in conjunction with the nine-month-old anti-monopoly push, market participants are understandably panicked.
Although retail investors apparently swooped in to buy the dip in some Chinese ADRs, the figure (above) was beginning to look existential before Wednesday’s ludicrous bounce.
The three-day drop in Chinese equities wiped out at least $800 billion in value. According to Bloomberg’s second-hand account of the CSRC call, “some bankers left with the message that the education policies were targeted and not intended to hurt companies in other industries.”
Note that implied vol on the US-listed China ETF went through the roof (figure below).
Although the past week has been especially harrowing, it’s worth noting that Beijing isn’t likely to allow an equity selloff to imperil social stability. There’s a sense in which those in power always govern with the consent of the governed, whether a given society is a democracy, an autocracy, a theocracy or ruled by an iron-fisted totalitarian regime. If enough people decide it’s worth the trouble to overthrow their rulers, they can almost always do it. It’s just a matter of accepting the inevitably that scores will die in the process. In a country the size of a China, an honest-to-God popular uprising would be impossible to suppress. There are just too many damn people, even for the second-most powerful military on the planet.
In 2015, China went to extraordinary lengths to stop the bleeding when the country’s last equity bubble burst. Since then, the state has intervened innumerable times to smooth out fluctuations in stocks.
Of course, determining the threshold beyond which any popular discontent attributable to falling stock prices becomes more concerning for the Party than the policy goals ostensibly furthered by the measures which triggered the selloff is impossible. Since 2015, state-backed funds have intervened quietly, in relatively limited fashion on the apparent assumption that if state-buying can stabilize things for a few days, people will calm down, move on and write off the whole episode to the vagaries of investing in Chinese assets.
This time could be different, though. International investors were most assuredly not amused by recent developments, which had a “shock and awe”-type feel.
“This morning I saw the first equity research note arguing the crackdown does not ‘in our view, imply a war against capitalism,'” Rabobank’s Michael Every wrote Wednesday, adding that,
The fact this is having to be stated still suggests fat tail risks. Moreover, Mark Mobius states “there is no way a global investor can ignore China” –which is true given contagion spreading to markets that have nothing to do with it– and that the crackdowns are positive because they are good for Chinese SMEs. As such, can we assume Mobius publicly supports breaking-up of US big tech and monopoly/monopsony Fortune-500 firms too, as per the recent US anti-trust executive order?
Chinese media are already floating that the ”National Team” may step in to stop the equity rout. After all, the Politburo meet this week: Yes, global capitalists are literally waiting on the Politburo. But if so, Beijing cracks down on firms, making their stock less valuable, and then buys the much-less-valuable stock in order to show the business is viable, and so (indirectly) bails out the foreign capital whose investments they are attacking with the crack down? Would that not demonstrate there is massive intervention risk? Or perhaps that doesn’t matter when it helps stocks, and it shows the equity analyst was right – this is how modern ‘capitalism’ works.
It’s pretty hard to beat that when it comes to witty sarcasm, so I’ll just leave it there.
Gimme back piracy! (“capitalism as God intended”)
What do you mean, “give me back piracy.” That’s already happened. We’re calling it “inflation” this time around. When you have companies openly saying they’re raising prices and will do it some more until people cry “uncle.”
So kill an industry and bail out the investors not by bailing them out but by buying up all the stock… so it’s just eminent domain for markets? “I’m sorry but we’ll be nationalizing the auto industry, here’s all your money back capitalist investors.” I mean I guess it makes sense just like European countries that freed their slave populations by buying them from the owners.
Chinese govt is blinking. Wait, US IPOs are okay. No, VIEs are ok. You misunderstood us on education companies. We’ll give them all the time they need to adapt. I suppose the property developers will be getting the next olive branch.