When your market tumbles, promote speculation with leverage!

Sad but true

The Chinese equities market has not been performing well. But regulators and market makers have the answer.

According to Bloomberg:

China may limit new share sales and allow investors to borrow money to buy equities in an effort to boost the world’s sixth worst-performing stock market…

They are going to restrict the ability of Chinese companies to do secondary financing, thereby reducing the supply of stock, while allowing those buying the stock (i.e. the speculators who have been taking a bath as of late) to borrow money to buy. The market goes back up, but the underlying issue companies starve for new capital. And sooner or later the speculators have to pay back all those margin loans.

It’s extremely short-term thinking. The Chinese are going to have to hope and pray that the market stays up long enough for companies to get the impending backlog of issues out the door. Those same companies will likely be borrowing like mad in the meantime. The only identifiably consistent concept here? Everyone is going to be deeper in debt.

If the Chinese government would just step in and loan money directly to the pummeled shareholders to prop up their brokerage accounts, you might just have the U.S. housing market.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.