Going Down

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Here’s what you missed last night in China:

For a record 12th day in a row, Chinese margin debt balances have dropped with today’s 8.5% collapse the largest in history. As of last night, there were around 570/1694 Shenzhen stocks halted/suspended and hundreds more on the Shanghai bourse leaving more than 54% of all Chinese stocks frozen ($2.6 trillion or 40% of value). China continues to try to manage leverage down (raising margin requirements on stock futures) while encouraging speculation (easing rules for insurers to buy blue chips and financing the purchase of smaller company shares directly) and CYNK’ing the entire market – if it’s not open, you can’t sell it and the price cannot fall! It’s not working as CSI-300 futures are now down 7.9% in the preopen.

If the fundamentals of China’s economy are out of whack — and they are — then equities must eventually reflect that. Beijing is Wile E. Coyote just after running off the edge of the cliff, afraid to look down because he knows as soon as he does, gravity will take hold and he’ll crash to the bottom. Even operating by cartoon physics, Wile E.’s fate is only ever delayed a brief second or two. By freezing trading on so many stocks, Beijing is acting as though the real world can operate by cartoon rules — indefinitely.

Or for at least as long as it takes for investor confidence to return:

China’s securities regulator banned major shareholders, corporate executives and directors from selling stakes in listed companies for six months, the latest effort to stop a $3.5 trillion rout in the nation’s equity market.

Investors with stakes exceeding 5 percent must maintain their positions, the China Securities Regulatory Commission said in a statement. The rule is intended to guard capital-market stability amid an “unreasonable plunge” in share prices, the CSRC said.

The question Beijing’s central planners can’t allow themselves to ask is, How is investor confidence ever going to return, when investors must suffer at the whims of central planners?

The other question Beijing’s central planners can’t allow themselves to ask is, How can China’s fundamentals improve, when capital is frozen-by-fiat into bad investments?

The third question Beijing’s central planners can’t allow themselves to ask is, Who will get China’s central planners to change their ways, without free elections?

Yesterday I wrote that China was on the brink, but that it was too soon to say on the brink of what. That picture is starting to clear up, don’t you think?