【Epoch Times, October 22, 2024】American economists have analyzed and pointed out that the monetary flooding by the Chinese central bank has led to a frenzy in the stock market, causing significant fluctuations, which have trapped inexperienced individual investors. The flood of money not only fails to stimulate the real economy but ultimately burdens the whole population.
On October 22, Voice of America published a special commentary article titled “China’s Stock Market in Chaos” written by retired professor of economics at Toledo University in Ohio, USA, and former president of the Chinese Economics Society in the U.S., Zhang Xin. The article indicates:
Over the past two years, China’s economy has been declining, with the youth unemployment rate rising to 18.8%, numerous stores closing down, including the landmark Meilong Town Square on Nanjing West Road in Shanghai, and a 24% drop in housing sales.
Xi Jinping’s economic governance strategy is to “strengthen the foundation and nurture the roots.” As an economist, I have never heard of this governing method, and my intuition tells me it’s akin to a makeshift solution, while Premier Li Keqiang at the Davos Forum described it as gradually adjusting the economy instead of resorting to radical measures.
However, this solution has proven ineffective. The GDP growth rate further declined to 4.6% in the third quarter, approaching the risk of missing the 5% annual growth target. Towards the end of September, a meeting of the political bureau was held. From the communique of the meeting and subsequent significant actions taken by various central bank departments, it is evident that the top leadership has abandoned the previous strategy of strengthening the foundation and nurturing the roots in favor of resorting to drastic measures by providing strong monetary and fiscal stimulus to boost the economy, particularly the stock and housing markets.
On September 24, the Central Bank of China announced two significant measures to support the stock market. One is called “targeted re-lending,” involving a disbursement of 300 billion yuan to listed companies for stock repurchases and holdings. Another measure called “swap facilities” allocated 500 billion yuan, allowing securities companies to use stocks as collateral to exchange for government bonds and obtain liquidity. Pan Gongsheng, the head of the central bank, mentioned that additional funds of 300 billion to 500 billion yuan might be added later as necessary. These names and methods may sound complex to laymen but essentially represent the central bank flooding money to listed companies and shareholders.
“Targeted re-lending” involves the central bank lending money to commercial banks for their disbursement to listed companies, who are expected to repay by buying back and holding stocks. This methodology essentially circulates the money, with the central bank’s 300 billion yuan loan converting into stocks held by the listed companies themselves, effectively serving as a cash injection. The central bank swaps its government bonds for illiquid stocks, which are undesirable in the market, held by securities companies. Subsequently, securities companies can use the government bonds as collateral in the financial market to obtain funds, thereby gaining liquidity to reinvest in the stock market. Ultimately, the central bank’s government bonds are exchanged for high-risk company stocks, which is generally an undesirable practice for the banking sector.
Can monetary flooding really boost the stock market and raise stock indices? It is known that the fundamental factor determining the entire stock market is the economic fundamentals, while the ultimate factor determining the value of a listed company’s stock lies in its profits and future prospects, making other factors only temporary influences. Monetary flooding does not sustain long-term stock values, mainly leading to short-term fluctuations at best. The 2015 stock market crisis in China saw the Central Bank and the government injecting 2 trillion yuan to no avail, eventually resulting in abandonment.
Indeed, the recent stock market flooding by the central bank led to yet another frenzy of significant ups and downs. Following the central bank’s announcement on the 24th, investors fervently increased their positions, resulting in a 30% rise in the Shanghai A-share index within a week, from 2,700 points to 3,500 points, with a turnover of 1 trillion yuan.
During the National Day holiday, millions of new investors, mostly born in the 1990s, opened accounts. After the holiday ended, on October 8, they flooded into the market, driving the A-shares to nearly 3,700 points. Subsequently, institutions began cashing out, causing a rapid decline of 12% in A-shares within two days, reverting to around 3,200 points where it has since fluctuated.
Through transaction volume and order data, it is evident that prior to the holiday, institutions inflowed funds to boost the stock market, while post-holiday, they reduced holdings to cash out, prompting a significant inflow of funds from individual investors who were subsequently trapped. For these new individual investors, the central bank’s monetary flooding created a “bull trap.” Following the central bank’s market stimulus, institutions realized that the performance of these listed companies did not warrant such high valuations. Consequently, around the 3,500-point mark, institutions began to cash out, while individual investors lacking information and experience found themselves trapped or forced to sell at a loss.
A report by Chinese media highlighted the case of Ms. Long from Zhuzhou as a typical example. Intrigued by the stock market frenzy, she opened an account during the National Day holiday and immediately purchased a stock worth 50,000 yuan on October 8, only to see it plummet, leaving her caught in the downturn.
Individual investors are still hoping for a second wave of market rally to escape their predicament. Unfortunately, without another injection of funds by the central bank, there won’t be a second wave. The profitability of these listed companies peaks around 3,500 points, a fact well understood by securities institutions. If the central bank provides more liquidity, causing a second round of fluctuations, institutions will wait to cash out at the peak, eventually leading the stock market to regress. The profits received by listed companies and shareholders are divided between filling financial deficits and lining the pockets of shareholders.
Will the central bank’s injection of funds stimulate the real economy? The answer is unlikely or very limited. China’s economic fundamentals are weak overall, and companies’ performances are unsatisfactory. Listed companies and shareholders acknowledge the lack of investment prospects and are more likely to hoard the funds rather than investing in the real economy, hence leading to what is known as the liquidity trap in economics.
Banks refrain from lending to those listed companies due to their internal information indicating these firms are not profitable, posing a high risk of loan default. Conversely, most private small and medium-sized enterprises in need of funds and with profit potential are not listed, thus missing out on the central bank’s liquidity injection this time. Therefore, the rush to inject funds into the stock market is seen as a quick fix for a larger economic issue.
There’s no such thing as a free lunch. When the central bank prints money and the Treasury issues bonds, ultimately, who bears the cost? Printing of money dilutes the purchasing power of the currency held by the people, meaning the extra printed money is eventually paid for by the public. The Treasury bonds will be bought by future generations of the nation. Consequently, using monetary flooding in the stock market essentially amounts to a wealth transfer, redirecting the money of the people and their descendants to unprofitable listed companies and shareholders, with no real benefit to the actual economy.