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China Has Its Own Plunge Protection Team

Jul. 31, 2015
by Bob Adelmann

China has its own Plunge Protection Team. Its efforts were in evidence on Wednesday as the Shanghai and the Shenzhen indexes, both of which had been flat most of the day, leaped up three percent and four percent, respectively, in the last 30 minutes of the trading session.

Jacky Zhang, an analyst at BOC International, a wholly owned subsidiary of the Bank of China, exclaimed: “Clearly it is government invention again.”

The team, made up of top officials of the Bank of China, China’s Securities Finance Corporation (CSF), the China Securities Regulatory Commission (CSRC), and others from the country’s 21 largest brokerage houses, is trying to avoid a repeat of the 2006-2008 bubble and collapse.

In early 2006 the Shanghai index was trading at just over 1,000. Over the next 18 months it exploded to 6,000 and then, within six months, was trading back at 2,000.

In early 2014 that index was still trading at about 2,000 when, once again, aided by margin accounts being offered to new investors seeking other places to put their investable capital than real estate (which was showing signs of its own collapse), it started trading higher. It reached 5,000 last November, then began its terrifying decline, hitting 3,600 before the PPT started intervening.

Those interventions knew no bounds. It implemented an entire panoply of measures to stem the tide, including:

Demanding that foreign banks wishing to continue doing business in China refrain from making any negative public comments about its stock market;

Lending $42 billion to those brokerage houses for them to use to buy stocks;

Demanding that those brokerage houses ante up some $20 billion of their own capital to purchase equities;

Announcing new stimulus in the amount of $40 billion for infrastructure projects;

Speeding up similar infrastructure spending already in the works;

Allowing margin accounts already underwater to remain open despite sustaining margin calls;

Demanding that the owners of China’s 300 largest corporations refrain from selling any of their stock for the next six months;

Eliminating any new public offerings of stock;

Cutting interest rates to new lows; and

Allowing the yuan to continue to depreciate against world currencies in efforts to stimulate exports.

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