Beijing on the Brink

On the brink of what is an excellent question — and one nobody has the answer to. But we do know it’s bad:

In an extraordinary move, the People’s Bank of China has begun lending money to investors to buy shares in the flailing market. The Wall Street Journal reports this “liquidity assistance” will be provided to the regulator-owned China Securities Finance Corp, which will lend the money to brokerages, which will in turn lend to investors.

The dramatic intervention marks the first time funds from the central bank have been directed anywhere other than the banks, signalling serious concern from authorities about the crisis.

At the same time, Chinese authorities are putting a halt to any new stock listings. The market regulator announced on Friday it would limit initial public offerings — which disrupt the rest of the market — in an attempt to curb plunging share prices.

While the exact amount of assistance hasn’t been revealed, the WSJ reports no upper limit has been set.

All short-selling — the practice of betting that stocks will fall — has been banned, and Chinese media has rushed to reassure citizens.

I’ve written here before that with 3.2 trillion US dollars stashed away in the People’s Bank of China, Beijing can afford to paper over a lot of trouble. Coincidentally, $3.2 trillion is how much money has been lost in Chinese shares over the last few weeks.

It took China decades to squirrel away $3.2 trillion. It took only three weeks for Chinese companies to lose that much value.

Of course there’s a big difference between shares and cash in the bank. The former is a relatively risky investment, meant to rise and fall in value with corporate performance and investor confidence. The latter is as sound as the US dollar — and so far, so good. But if Beijing is desperate enough to use its dollars to prop up the equities markets, they might be shocked at just how quickly they can burn through hundreds of billions of dollars, or even more.

The hope of course is that eventually the People’s Bank will get its money back. Investors will borrow the cash to buy shares, the shares will keep or increase in value, order will be restored to the equities markets, and the money will flow back into the central bank.

We tried something like that with TARP a few years back, and it worked. But our Congress had the luxury of conjuring up $700 billion mostly out of thin air. China has to put its own hard-earned cash on the line.

That has got to be causing some sleepless nights in Beijing.