The Shanghai stock market bubble, which had seen share prices double in the space of a year, had burst and as usual it was the late comers who had stampeded into the market, the small punters, who lost their shirts, even their homes. More than twenty million new retail accounts had been opened in the weeks leading up to the crash and to make matters worse the Chinese government had approved rules that allowed investors to use property as collateral to guarantee margin calls.
Both amateur and professional speculators faced margin calls on their highly leveraged positions and as in all market panics they started selling as fast as they could, with both hands and both feet as one commentator put it.
One of the factors that accelerated contagion was the important role margin financing had played in the bull market. However, it was individuals who were hit, and that in itself was not sufficient to cause a systematic collapse.
The trouble came as businesses were suspected of margin trading and using their own stock to obtain bank loans. This posed a different kind of problem making them vulnerable to margin calls and explained why many companies had suspended the trading of their shares to pre-empt action by the banks.
Was this the disaster Gordon Chang had been predicting for years? Maybe, considering a Chinese blogger had been arrested in Beijing for spreading rumours that brokers were jumping off roofs. True or not it was a sure sign of growing nervosity.
As Shanghai and Shenzhen stock markets boiled over, six hundred million Chinese peasants continued to live from hand to mouth, as they had since time immemorial. Would they ever escape their misery? It began to seem unlikely as the prodigious growth trajectory of China flattened out. The easy part was over, the difficult part was yet to come.
All that apart the situation was not as bad as it appeared. Pat Kennedy was reassured with the thought that in just one year the Shanghai Composite Index had gone from 2000 points to 5000 plus, so even at 3600 points the bank had made solid gains, pulling back from the speculative brink when it had.
A SAFE HAVEN
It was reported one in three rich Chinese wanted out. They had made their packet and wanted to make sure it, or at least part of it, was safely out of reach of authoritarian action, and Sarah Kavanagh was only too willing to help.
That morning she bubbled over as she checked out the Shanghai Composite Index. In London it was eight in the morning and Chinese stock markets would close in half an hour. The index had plunged another six percent. But what was bad news for many Chinese punters was good news for Sarah. The young real estate agent was inundated a surge of interest in the already hot London property market as wealthy Chinese investors sought a safe haven to escape the turmoil of Shanghai’s stock market.
Market instability had sent Chinese buyers scrambling for shelters to protect their money and in the last week alone she had signed up half a dozen clients for properties in the Vauxhall development and anticipated more deals before the month was out. The interest was such that one buyer was looking at acquiring a whole block of apartments.
In Shanghai, retail investors had rushed into the market, more often than not with money borrowed from securities firms through margin-trading schemes. Others jumped in via umbrella trusts, which loaned investors money from wealth-management products, peer-to-peer lenders and asset-management firms.
The market plunged and accusations flew. Regulators clamped down on futures trading, launching a witch hunt for what they labelled as illegal or malicious short-sellers. Rumours circulated foreign short-sellers were sabotaging China’s market.
The recently egalitarian Communist nation had become one of the most unequal on the planet with high worth individuals accumulating mountains of cash destined to secure their future against crises and a lot of that would be heading overseas.
INI Hong Kong Private Bank was attracting huge cash inflows and its City based property funds prospered as Chinese investors dumped their stock holdings. Smart money had been flowing out of China for months as its stock markets rose to dizzying heights. Savvy investors had got out during the first and second quarter, after doubling their winnings, and winnings they were.
Even Angus McPherson was surprised by the number of new individual Chinese investors capable of putting upwards of ten million dollars into the bank’s Dublin based funds. Lili’s family had been behind the new bank, Eireann Private Bank, Kennedy had incorporated in Dublin with branch’s in London and Dominica, offering worried Chinese industrialists, who had no other place for their excess reserves, an attractive investment in its dynamic funds.
Sarah had seen the boom coming and was pleased with the efforts she had invested in acquiring a passable degree of spoken Mandarin with a crash course of business Chinese at the Confucius Institute. After eighteen months she could converse in simple everyday Chinese, something that gave confidence to her clients and their wives, some of whose grasp of English was practically non-existent.
GREECE
News came of Syriza’s capitulation as Slovakia’s finance minister told the world they had reaped what they sown with their ‘Greek spring’. The parallel was unjustified considering the Arab world, encouraged by the West, had attempted to throw of the yoke of despotism and oppression, which was not the case in Greece, theirs was one of pitiful government and widespread corruption. There was no torture or death, the days of the Colonels were long gone.
Certain commentators likened the Greek acceptance of EU demands to another Versailles, of course there was not twenty million dead, or great swaths of Europe devastated by war. It was a simple bankruptcy arrangement whereby the debtor was put under the supervision of the court.
It was a result of Greece’s inability to reform, of pursuing policies that appeased every demand, popular or otherwise, of procrastination, the accumulation of unsustainable debt, in the vague hope their problems would go away. Were the Greeks profligate? Certainly, but no more than fellow member countries of the EU, including France, Italy and the UK, whose decision making process dodged the real issues and whose debts were perhaps the greatest in history in time of peace.
The vociferous British press cried foul, leading a sustained campaign against the Eurozone and the EU in general. To have found a comparable outpouring of vitriol it would have been necessary to go back to the time when English pamphleteers lampooned Napoleon, at the moment his armies occupied large swaths of Europe and his marionettes, including his own family members, were foisted onto the thrones of Europe, namely Italy, Holland, Spain and Westphalia.
Napoleon had declared: I wished to found a European system, a European Code of Laws, a European judiciary: there would be but one people in Europe. The ideas was noble, not the means. In 2015 democratically elected European leaders, wrangled through the night to find a compromise, as they had been doing for sixty years, which was surely better than waging war.
Had Europe come of age? Could those fools who stood on the sidelines crying for disunion and strife: the little Englanders of UKIP; Podemos; the Front National, the PVV of Geert Wilders and others, be held in check? If not the dogs of war and strife would be unleashed and the consequences terrible.
*
The time had come for a division of the spoils: Greece had lost and the moment for the carve-up of its assets had arrived. After an unequal battle the victors dictated their terms in a treaty that set out the sequester of public assets to the tune of fifty billion euros. A massive fire sale that included the privatisation of infrastructure such as sea ports, airports, utilities, transport and logistic systems, all to be sold off to foreign bidders in order to secure a new bailout of eighty six billion euros.
Amongst the first assets on the block of the ambitious privatisation programme was a network of regional airports, the most profitable of which were those of the islands of Mykonos and Santorini, ceded in a fifty year concession to the German operator of Frankfurt International Airport, owned by the German Federal and Regional authorities.
It was a grim warning to Europe and all those wh
o chose, like the Greeks, to vote for corrupt self-interested politicians and parties concerned only by their own short term survival.
MARKETS AND COMMUNISM
“I regret to tell you Pat, China has become one big casino,” Kennedy’s father-in-law told him. “Even people in the smallest towns and villages are buying and selling shares. Can you imagine that, even peasants, as Mao liked to call our small holders. Some people in Canton and Shanghai have even turned it into a full time job.”
“Yes sir,” Pat replied respectfully.
“When old men like me give up mahjong to bet on the market you can be sure trouble is brewing.”
It was nothing new to Pat, but to hear it from the horses mouth was. Kennedy had seen it all before, it reminded him of Dublin in 2008, when taxis drivers and barbers had bragged of the profits made from their property investments. Suddenly millions of Chinese from every walk of life were being drawn into a speculative stock market frenzy.
“Did you know the first thing they do when they wake up is check the market? Then they spend the rest of the day on their phones following the board, when they are eating, working and even in the metro or in their car. Believe me when I say they dream of flashing screens,” he said greatly amused at the thought.
The wise players were those who had got in first, a year earlier, and got out after racking up substantial gains, and as usual it was the late comers who paid the price as the bulls gave way to bears.
It was a far cry from Deng Xiaoping’s timid steps towards a market economy and another universe compared to that of Mao’s Revolutionary China. Hardy Communist peasants had been replaced by the kind of wide eyed punters who could be seen at the tables of Macau hanging on the turn of a card or a roll of the dice.
They were ordinary Chinese, drawn by the mirage of easy gains, those who had forgotten Communism, that is if they had ever believed in it. What attracted them was the lure of quick money and what they could buy with it. For the two or more decades years the Chinese had watched a frenzy of construction: offices, appartments and shopping malls, which instilled in them a feverish desire to get rich, by any means, and quick.
“Let me tell you a story Pat. Last year I was in Paris with my friends. What did they want to see apart from the Eiffel Tower? Galleries Lafayette! Shops, shops and more shops! Of course it is complicated for them, they don’t speak English or French, they know nothing of European history, but they do know how to shop.
“We Chinese have only done what we have been told to do. Take the stock market, the state-run news media with its euphoric headlines, urged ordinary ordinary people to rush into the market and in doing so they have contributed to this bubble.
“Brokerage firms have made it so easy to open an account that nearly forty million were opened in second quarter of this year, that’s compared to nine million in all of 2014, can you believe that?”
It was a fact, the same brokerage firms had allowed their offices to be transformed into meeting places, almost like social clubs, where punters could chat, exchange tips and tell stories. Every day they cheered the closing bell as markets in Shanghai, Shenzhen or Hong Kong reach new highs. They learnt nothing from the 2008 crash when the Shanghai composite dropped seventy percent.
“You see we Chinese are inveterate gamblers. Did you read Lu Xun’s novel Shanghai Morning? Well it was exactly the same in the 1930s.”
Pat nodded, he had already read the long novel his father-in-law had given him, the Chinese and English versions, at least in part, enough to understand little had changed on the Shanghai Bund in three quarters of a century.
“Small investors were encouraged by reports in The People’s Daily, which encouraged people to put their money into shares with reports of remote villagers investing in shares,” he grimly told Kennedy. “Now those unfortunate villagers and millions of others are crying in their rice bowls, some bet their life savings and others lost their homes.”
*
The policy restricting the families of government officials: spouses, children or children’s spouses, from running private companies by the Shanghai Municipal Government, the equivalent of a provincial government, had Kennedy concerned for the Wu family business.
“Don’t worry Pat, my father is semi-retired,” Lili reassured him, “he plays what you might call a wise man role in Guangdong politics. In any case officials’ relatives have been banned from being involved in certain business activities for years. It’s just part of their new crackdown on corruption.”
“Doesn’t it worry you?”
“No. Why should it? Our family business goes back to the days before Mao. We have always avoided overt corruption. These laws are designed to prevent blatant corruption, kickbacks, misappropriation of funds, illegal building permits and that kind of thing. Our business is textiles, electronics and banking.”
Pat nodded. There was nothing illegal in banking.
The Shanghai Government had discretely posted a notice on its website forbidding relatives of officials from engaging in business in the city. It included relatives of senior officials in city departments, district and county governments, and courts. The same officials were already prohibited from being involved in commercial or industrial businesses activities.
*
The tales making the rounds in Shanghai and Shenzhen were reminiscent of Wall Street in 1929. Chinese financial markets had crashed ten percent in one week following an already huge twenty percent over the previous six weeks.
Some had been comforted by the government’s measures to stabilise the stock market, but July 27, signalled the start of a new rout with the Shanghai Composite falling a huge 8.47%. It was the greatest fall since the crash of 2007-2008, when over a twelve month period, that is from October 1, 2007, to October 1, 2008, the index fell from 5954 points to 1728.
Many had feared 2008 was the precursor of another depression. It was not. The same fears were being voiced about China and in the same way they were exaggerated, which did not mean that all would escape unscathed, those who had bet their life savings on the hope of an eternal rise in the prices of homes would certainly be hurt. As the hackneyed Wall Street saying went: a sucker was born everyday, though in China it would have to be changed to a hundred thousand.
Nevertheless, the crash was an indicator of the state of health of the world’s second largest economy. Beijing had been caught unaware and was scrambling to rein in the market forces it had inadvertently unleashed. It was evident that the stock market downturn reflected a wider economic trend and future growth would certainly be less spectacular, a situation which would have repercussions on property, construction and infrastructure.
The real problem was that of excess capacity and a mountain of bad debt, there were many similarities with the pre-2008 situation in the West, which posed questions about the solidity of China’s financial institutions and fuelled the fear of a hard landing.
This was reflected in the brutal fall of commodity prices, which would hit commodity based economies starting with Russia followed by Australia, Chile and South Africa.
China had a voracious appetite for energy and raw materials, consuming vast quantities of oil, coal, copper and iron ore from Australia, Chile, South Africa, the Middle East and Russia. Every single day, huge ships - just two or three of which could carry the equivalent of all the goods transported by all nations over all the world’s seas in the days of Captain Cook - discharged their cargoes at Chinese ports, highlighting the interdependence and fragility of the world’s economies.
CHINA’S PACIFIC EMPIRE
Where the Andes dropped into the Amazon rainforests of Caqueta Province, over one thousand Chinese engineers and workers were building a hydro-electric dam that destined to provide sufficient power for almost a quarter of the country’s needs.
Wherever Tom Barton travelled in Colombia, or its neighbours, he witnessed evidence of a vast Chinese plan to extend its influence and presence along the Pacific façade of the South American continent. Onc
e regarded as the chasse gardée of Washington, Chinese interests were making their mark on the continent at lightening speed.
Barton was quick to see how his links to China could be of use, as projects from Chile to Honduras for sea ports, canals, refineries, dams, roads, railways and bridges were being planned and financed by Chinese banks and built by Chinese engineers.
South American leaders hailed Chinese investment and flattered Beijing’s leaders for their interest in the development of their respective countries. For a century North Americans had scorned the world that lay beyond their southern border: underdeveloped, unstable, dangerous and at best an export markets for American manufactured goods within the protectionist framework of Washington’s policies.
Washington had not measured the transformation of Central and South America as the consumer society reached every corner of the continent. As for the region’s leaders they realised consumerism replied better to their citizens needs than revolution and Marxism, as globalisation and Cornucopia reached out to every town and village thanks to introduction of modern logistics and technology.
Chinese credit oiled the mechanism of exchange, not only satisfying the needs of governments and consumers across the planet, but also that of China’s industrialists and workers.
Cornucopia Page 47
