This article is making an attempt to find how the various stock markets in China, Taiwan, Hong Kong, and the US interacted with each other after Mr. Xi JinPing became the President of the People's Republic of China (PRC) in March 2013.
For clarity, this article compares the main indexes of the 4 markets all in one single chart.
The chart started by saying Mr, Xi Jin Ping took office in March 2013. He succeeded Mr. Hu JinTao, becoming the 7th President of PRC.
The Achievement of Mr. Xi JinPing
Xi is well known for his anti-corruption practice and the one Belt One Road(OBOR) initiative. Economically, the PRC people see him as a successful President who is behind China's export-driven growth. Xi's achievement must be the reason behind the super growth of the Chinese stock market in mid-2014.
The Chinese Stock Market Bubble in 2015/16
During Xi's term in 2014, the Chinese Yuan or RMB became one of the world's top five payment currencies, overtaking the Canadian dollar and the Australian dollar.
The Chinese stock market bubble eventually ended around February 2016. The Chinese markets have not quite recovered since.
The Hong Kong Stock Market
While the Chinese markets were flourishing to form the bubble, the Hong Kong market remained quite steady, trailing behind the rest of the stock market until the Hong Kong Street Protest broke out in March 2019.
As shown in the chart, the Taiwan stock market had a better time compared to Shanghai and Hong Kong markets. It appears to trace closely behind the US market after 2020.
Reuter claimed that China's debt has risen dramatically largely due to the credits offered to the state-owned enterprises. It claimed that this debt has threatened China's stability, slowing down the economy and the stock market growth. However, many are not convinced. They argued that such fear is overdone. Let's examine what the statistics and charts are telling us.
Reuter explained this debt level is not too high when compared to Japan's 370%. However, the rate of rising has fastened; otherwise, China's debt appears to be normal & manageable.
But Reuter went on to say that was not the case for the Domestic or Corporate Debt. The debts without counting the Government's debts have gone way above the rest of the countries. This is particularly obvious as shown in this chart.
The chart is showing that China Domestic credit is mimicking the path of Japan about 20 years ago, during which time, Japan was embarking on its journey to the "lost decade".
As China's GDP in 2020 is about USD14.7 Trillion; hence, for the 182% GDP debt, each Chinese of 1.3B people owed the Chinese banks about USD20,000
What about Hong Kong & Macao?
If the Domestic debts in Hong Kong and Macao are low, it might help China to balance out the Corporate Debt; but the debt situation in Hong Kong and Macao is even worst as shown in the following chart.
The following is the bar chart showing China and its SAR regions' Domestic debts by Banks against other countries or areas. China's Domestic debts by Banks are about 40% higher than the UK and 60% more than Japan. The SAR's debts are much higher.
Presently, the 3 big stock exchanges are showing mixed results. Shanghai Composite (SSEC) is trading around the upper trend line of a symmetrical triangle according to the weekly chart as shown below. Hong Kong HSI has just broken down the lower trendline and Shenzhen is seen climbing up the lower trendline.
The Technical Analysts will usually say the trend of the market will be bullish if the index can break above the symmetrical triangle or vis-visa. This is exactly what the monthly SSEC index is about to do and Shenzhen has done recently. But there was no appreciable volume supporting the two break up movements; meaning, the stock rising of the index was weak and the index might reverse its course at some future time. As for Hong Kong HSI index, it has a false break up earlier. It is now heading downwards after breaking the lower trendline.
Overall, we are expecting SSEC and Shenzhen indexes to continue moving up to test the resistances, failing which, we will expect these 2 indexes to move downwards. As for HSI, we are expecting it to make a move to retest the lower trendline that it has just broken.
Conclusion
China, as a country, might have manageable National Debt but one cannot say the same for the Domestic or Corporate Debts which is now the highest in the World. It would be a concern to investors to watch out as some very big private property developers have defaulted their interest payments recently. Any action by China's banks to limit their risk on the loans given to the private sectors would have serious repercussions for the stock markets, not only in China but also all over the World.
Disclaimer: This article is for information and educational purposes. Readers are advised to conduct their own research and study to make their own investment decisions.
The NPL of the banks will affect the country's economy. When a country ignores its NPL problem, its economic performance will suffer.
The banks' NPL is an indicator of a debtor’s inability (or unwillingness) to pay the bank. A high NPL will become a burden for both the banks and the borrowers. It traps valuable collaterals. Any unresolved debts will make it more difficult for debtors to obtain new funding for their investments. The banks on the other hand will have to bear the cost of NPL Its balance sheets and profitability will be greatly affected. Allow NPL to be unchecked, it will affect the country's economy.
Italy faced economic problems when its NPL ratio reached 17% in 2018. Greece almost went bankrupt when its NPL ratio hit 46% in 2017. Across the European Union, NPL ratios have doubled between 2009 and the end of 2014.
China's present NPL ratio is around 2%. This is a very healthy figure. But, many property developers are presently heavily in debt. Today, they manage to stay above water; tomorrow, some are expected to go bankrupt.
Presently, real estate development in China contributes about 14-15 per cent of China's GDP. If construction and other related industries are included and accounted for, the contribution could exceed 25 per cent of GDP.
China's domestic debts were 134% of GDP (9.57 Trillion USD) when Xi took office in 2013 as Chairman of CCP. The debts ballooned to 185% of GDP (14.72 Trillion USD) after 7 years in 2020. So the increase in domestic debts in China was around 14.43 Trillion USD (14.72*185% - 9.57*134%) since Xi took office in 2013. This roughly works out to a debt increase of around 2.0 Trillion USD per year or 166 Billion USD per month.
The following will show one of place where the debt money could be coming from.
Debt is just like the opium; once addicted, the habit is very difficult and painful to kick.
The Japanese domestic debts reached the same level of 185% of GDP (4.5 Trillion USD) in 1999 & the domestic debt was about 8 Trillion USD The Japanese must have felt the pain of these domestic debts. To resolve this, they slashed the interest rate to negative in order for its people to refinance their debts at much-reduced interests. They managed to reduce the domestic debts to less than 100% of GDP in less than 3 years. But, they lost nearly 20 years of growth thereafter as shown in this attached chart. Historians often term this Japanese loss in economic growth as Japan's "Lost Decade"
Will China suffer the same fate as Japan?
Going ahead, China will need to be very careful in managing its domestic debt. There is a tendency for the debts to explode as evidenced by the bond defaults by big property developers like Evergrande and Shimao. The banks too are not in good shape. The smaller local banks are presently restricting depositors from withdrawing their savings to save bank runs; the larger one like Nanjing Bank has rumours that their off-balance sheet items are not that healthy.
Many must have borrowed from the banks to finance their housing. These people can be very unhappy and reckless if they have no money to pay the bank interests & they are jobless with the banks or developers chasing after them.
It would be harder to expect China can manage its exploding domestic debts better than Japan because:
a) Japan has a longer growth history than China before they faced the "lost decade"; also,
b) The Japanese did not have a long economic enemy list; lastly,
c) The Chinese domestic debt is nearly 3 times larger in value (China domestic debt: 26.79 Trillion USD in 2020; Japan domestic debt: 8 Trillion USD in 1999).
The data shows that the Chinese domestic credit debt has risen to USD 42.7 Trillion in June 2022. It has been rising at a rate of about 10% per year. Based on a population of 1.4 billion people, this debt is about USD 30,000 per person. Interest based on 5% will be roughly USD 2.1 Trillion or about 20% of 800 million people's salary @ around USD1,100 per month.
This debt of USD 42 Trillion is about 250% of China's GDP @ USD 17.6 Trillion; in other words, China's domestic credit debts have increased 68% of GDP in a short span of 2 years from 182% in 2020 to the present 250% in 2022.
Because people have been borrowing money heavily, the Chinese banks' bad loans have increased by almost 107 billion yuan (USD 15 billion) in the first half of 2022 to 2.95 trillion yuan (USD 430 billion), according to the CBIRC.
Every country will need to print money to cater to the expansion of its economy.
The faster they expand their economy, the more money they will need to print. If a country prints more than to cater to the economy; for example, to handle the debts or to loan out money to the rest of the World, it will show up in this chart maintained by the World Bank.
The chart measures the "broad money" circulating in the economy. If a country prints money more than last year, the chart will show an increase as % of the GDP.
The chart shows that Japan is the country that has printed the most money to handle its rising debts; it has printed about 2.8 times the size of its economy. It is closely followed by China, which started printing in the '60s. The printing exceeded the US in 1990 and has never looked back since.
What about Hong Kong and Macau?
Hong Kong and Macau have printed very much more than Japan. Today, Hong Kong's broad money is 4 times more than the size of its economy. Hong Kong is followed closely by Macao which has increased money printing by 1.8 times in 2020. Both Hong Kong and Macao increased their money printing since China took over the counties in 1997.
(Doubleclick picture to read the Straits Time news)
The World Bank data as shown in the attached chart clearly indicates that China's GDP growth rates have slowed down recently to 0.4%. The Chinese economy has been slowing down very fast in the last 20 years at a rate of about 10-12% a year.
The Chinese GDP is likely to become stagnant or go even below water in the years ahead. This is because China has a domestic credit debt of about 250% of GDP at the moment. It might mimic the "lost decade" of Japan. Japan started its economic recession in 1999 with a staggering domestic credit debt of about 185% of GDP. It has since lost about 20 years of economic growth.
Japan lost not one decade but two decades of growth after its Domestic Credit Debt hit about 187% of GDP in 1999. Before then, the housing price already started falling as shown in this chart. This is also felt present in the Chinese economy. The Chinese Housing prices started to fall in Q3 of 2021.
Simply put, it is a trade that one borrows money from brokers or bankers to buy stock in the stock market or a currency in a Forex Exchange. Here is an explanation video
So What is the Danger?
Actually, there is nothing dangerous about Margin Trading. It is just a financial tool that investors can use as leverage to buy more stocks or currencies.
There is a danger only when the investors become very greedy, starting to trade margins above their means, borrowing more and more margin until they cannot pay up when the brokers or bankers initiate a "margin call".
What is a Margin Call?
A margin call happens when a broker demands that an investor deposits more money or securities so that the margin account is brought up to the minimum maintenance margin. A margin call often happens when there is a market crash and the account value falls below the broker's required minimum value. When there is a margin call, the investors are often given little time to do the "top-ups". In the event that the investor cannot top up the account within the stipulated time, his brokers or bankers will have to right to dump all his stocks or currencies in the market at ridiculously low prices to recover their losses.
Why do I have to worry?
Rightly, one need not worry much if one does not “play” margin trades; however, one would have to worry when the margin trades in the market are running out of every proportion with a possible risk of causing a market failure. This is when margin debts will be so high to cause en-masse margin calls that will cause markets to collapse.
Can Give Example?
1. The SGX’s Penny Stock Market Crash in 2014
A Malaysian businessman and his partners manipulated the market and caused the price of 3 Nos of SGX’s penny stocks; namely, Blumont Group, LionGold Corp, and Asiasons Capital, to surge by more than 800 per cent in less than 9 months in 2014. A Singaporean trader by the name of Quah Su Ling took up a margin loan of a very big amount from Goldman Sash London. When the price of the 3 penny stocks fell on Oct 2, 2014, Goldman Sash demanded Quah to top up $48 million in her margin account within one and half hours and started selling her stocks. Over the next 2 days, $7 billion were wiped off from the 3 SGX’s penny stocks. Blumont and Asiasons’s share prices dropped from a peak of S$2.0 to less than 1.0 cents in weeks. This caused the SGX's penny stock market to crash. The details are covered here
The following chart prepared by “Dishort.com/Advisor Perspectives” illustrated what is the present situation of Margin Trade in the US market.
From the chart, one can clearly see that the margin debts peaked and then fell in the last 2 market crashes in 2000 and in 2008. The 2000 crash occurs when the margin debts reached about 170% while S&P climbed 75% from 1997. There is a 100% point difference between the margin debt and the S&P growth. As for the 2008 crash, this point difference is about 150%. Presently, this point difference is getting even larger at about 175% as of July 2018. There is no definite proof that a market crash is imminent but at this level, the risk of a market crash would be high.
How Bad will be the present Market Crash?
It is anybody’s guess. Many have speculated for a crash to happen in mid-2015 when Margin Debt was as high as 250%. But this crash did not happen and stock markets continue to ride higher after Trump was elected and promised to make “America Great Again”. The following chart will show the risk of market failure is much higher than those in 2000 and 2008 because the investors have choked up 3 times as much as a credit balance to do margin trades. (Note that the investor credit in 2008 was among the lowest because there was a liquidity crisis in 2008 where banks almost run of money. Investors must have been using their assets rather than their money to maintain adequate balance in their margin accounts.)
Why Government Did Not Ban Margin Trading?
Most Governments realize the risks of margin trading but could not always control and contain it as it will affect stock market functions. China experienced the worse market crisis in early 2015 when Shanghai Composite plunged about 8% in a single day. Then the Authority was trying to clamp down on margin tradings and risky lending practices used by China’s biggest securities brokerages. The market has not recovered fully even 3 years after.
In Conclusion
In the 2008 stock market crash, 7.0 trillion USD was wiped off. In the 2000 crash, 8 Trillion USD disappeared within weeks. This coming financial crisis could be even larger.
CFD is an abbrev for “Contracts For Difference”. Many treat it as another form of Margin Trading except for the following
1. One will need much less capital outlays because of the very high margin or leverage in the trade. For example,when one takes a normal margin loan,one will need to come up first with about 40% of the capital investment with a 60% loan.For CFD,the capital investment may just be 5%;
2. The risk will be much higher due to the high leverage;one can easily lose 100% of one’s capital;
3.In CFD,there is no ownership of the stocks or the underlying assets. In normal margin trading,one still owns the rights to the stocks such as voting,dividend,corporate action, etc;however,the brokers or the banks are given the right to sell the stock to recover their losses, if any.
The market is again reaching a testing point after the last market hoax in 2018 where we saw DOW Future losing about 25% or 6,000 points from 28,000 to about 22,000. Then the market was spooked by "heightened trade and geopolitical tensions". There were not many concerns about such a crisis having any impact on inflation and therefore, did not attract any monetary policy response.
If a market crash were to happen in 2021 as expected after much speculation, it could be a different picture altogether. First, the market has had no appreciable or reasonable market correction in the last 10 years between 2009-2019; instead, we saw the market's rising rate double from 5% per month to 10% per month in the short span of 21 months between 2020 and 2021.
Rightly speaking, the market could have continued its way up at the pace if the inflation can remain as mute as before but the last inflation rate of 6.8% has prompted market speculation that Fed is going to increase the interest rate soon to tame the inflation. This will not be good news to those investors who have been "living" in the past using margin trades to earn a living. The margin trade business has gone sky-high with a rising rate about the same as the stock market for the period in the last 2 years. We should see the margin traders will start to sell their stocks as they will no longer be able to hold the increasing margin rate with the market price falling every day when there is a market crash.
What caused the Present Inflation and Why the concern?
Many speculated that the monetary easing especially the recent one has caused this present inflation rate to rise. They are not wrong as can be seen from the following M2 money supply chart. The chart is showing us clearly that the growth of the M2 was gradually rising over the past many years except for the last 2 years when we can see a sudden jump. This signifies that there was an injection of cash or equivalent causing market inflation to rise. This is because the M2 money supply is measuring the money that mostly flows within the community; for example, cash, and checking deposits and is easily convertible near money.
Inflation will always attract Fed to take action in the past. They would either raise interest rates or tighten monetary policy which would affect not only the stock market but also the rich people.
Fed has been using monetary policy in the past to fight inflation. This is because reducing the amount of money in circulation will curb consumer spending, and that will, in turn, lower the rate of inflation. The question is when?
The followingis a chart showing the Margin Balances collected by FINRA for the various months since 1997. The chart is showing the long-term trend lines of Margin Balances and the US long-term interest rate are moving inversely over the period; however, one cannot say so for the short-term movement. This may be because some investors were seeing opportunities, for example, to borrow more money to buy stocks when others were dumping the stocks. It may be also because the investors did not feel the pain as the interest rates were rising in small steps of 0.25 percentage points each time.
Update: 18 July 2022 The Possible Next Market Move
The following charts will show that the Margin Debts in the US market have dropped to a level that could have triggered the urge to restart the engine for the US market.
One will easily notice that the curve of margin debts tended to run below and follow behind the trend of the S&P500 until the year 2005/06 for some reason probably due to a change in the SEC rules. Since then, margin debts have always been running and leading the S&P500.
It is interesting to observe the following:-
Figure 5
a) Margin debt is always a leading indicator for market crashes; it will fall before the market index started to fall;
b) Except for the Dot.com bubble in 2000 and before the SEC rules were changed, the margin debt will rise first, followed by the market and also when margin debts almost reach and touch the S&P500;
Figure 6:
1) The chart shows that margin debt is no longer the main source of the "driving force" behind the market. The investors could have found and used other sources to drive up the market, especially when such changes occurred after the latest round of QE which is also driving up US inflation at the same time;
2) Nonetheless, the curve of margin debt as % S&P has just hit support again. It might have indicated that the market could have recovered provided there is no further aftermath event like Lehman Brothers in 2008 causing secondary damages to the stock market and Fed is able to control its monetary policies to avoid a hard landing.
Disclaimer: This article is for information and educational purposes. Readers are advised to conduct their own research and study to make their own investment decisions.
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These insurance premiums could add up to more than SGD 1,500 per year for each Singaporean.
Why the Differences?
There is a Chinese saying about "the wool always comes from the sheep".
The difference is on whether the free medical treatment services offered by the Government hospital have been prepaid by the taxpayers.
In this case, the Hong Kong government could have already collected a fee from the Taxpayer and therefore, there is no need for the Hong Kong resident to pay for the service again.
Example?
A good way to find if the above statement is true is to examine and compare the personal income tax structure between Hong Kong and Singapore as shown in the following example.
According to statistics, the average salary of a working person in Hong Kong is around HKD 440,000 per year or HKD37,000 per month. For the workings of this example. let's assume that the average salary of a working person in Singapore is the same i.e around SGD 79,000 using a conversion rate of 1 SGD to 5.58 HKD.
If we work out the personal income tax that a Hong Kong and a Singapore worker have to pay, we will have the following situation:-
The above working shows that a Hong Kong worker has to pay 13.4% of his annual salary whereas a Singapore worker has to pay only 4.15%. In other words, a Hong Kong worker will have to pay SGD 7,078 more than a Singaporean worker. This SGD 7,078 should be more than enough to cover not only the insurance premium of the medical treatment but also many other Hong Kong government's essential free services.
Therefore, we can conclude that the free medical treatment provided to Hong Kong's residents must have been prepaid by the taxpayer.
