The "Junk Effect" In China'S Stock Market

China's stock market is becoming a dumping ground for investors' bubble capital.

Yes, the Chinese stock market is just as dangerous as it sounds.

The stock market problem in the middle of 2015 triggered the pformation of household savings deposits into the bond market through investment and financing products.

Now the stock market seems relatively calm, and the housing prices in big cities are rising rapidly. These economic trends may attract the attention of retail investors.

This is part of a bold plan.

In order to pform the economic mode that takes investment as the main body into an economic mode taking the service industry as the main body, the Chinese government has begun to reorganize the zombie enterprises in the sunset industry.

These enterprises are mainly concentrated in manufacturing, real estate and bulk industries.

They generally have such problems as high debt, overcapacity and weak market demand.

In view of this, the Chinese government has begun to take a series of measures to deal with the reversion of these zombie enterprises, and hopes that the debt problems brought by these enterprises will eventually bring benefits to the further development of the economy.

This series of measures involves pushing some corporate debts into the stock market, which can be seen as another government led response after the two stock market crash in the summer of 2015.

If this measure is very effective, the Chinese government will support a historic rebound in the stock market for some time.

This is the same as we know in the past. As we can see, between 2014 and the middle of 2015, China's stock market rose more than 150%.

Over time, if these measures are very effective, the zombie enterprises will be reorganized, and the excess capacity will be thoroughly cleared. Millions of laid-off workers from these enterprises will also be resettled in the service industry, and the bad debts in the bank balance sheet will also be stripped.

Of course, ideally, at that time, the stock market will not collapse.

Just keep looking down with us.

At present, many troubled state-owned enterprises (SOEs) rely on them.

Despite the huge increase in the number of non-performing loans (NPLs) on the bank balance sheet, the government still allows enterprises to continue financing operations.

When a new round of stock market takes place, funds will leave the bond market and the government can only do the painful work of deleveraging bank balance sheets.

Since the collapse of the Chinese stock market in the summer of 2015, a lot of hot money has fled, and a large proportion of them have entered the corporate debt market.

Wei Yao, senior analyst at Xingye Bank, issued a paper in March.

According to Societe Generale, from 2014 to 2015, the issuance of domestic enterprises' financing bonds increased by 21%. By the end of 2015, the total issuance of corporate bonds accounted for 21.6% of the total GDP value of domestic enterprises, while the total issuance of corporate bonds accounted for only 18.4% of the total GDP value a year ago.

Therefore, this is a problem that needs to be solved, and it is once again shown that it is absolutely dangerous.

This means that the economy is beginning to bubble again and there are some interesting phenomena on the market.

"In our view, the corporate bond market is becoming more and more vulnerable," Yao said in the article.

It will also become a haven for bad debts.

The Chinese government has discussed this issue and put forward two countermeasures. The first measure is to deal with bad debts by means of "debt to equity swap" by banks.

Another measure is to allow local banks to enter this once booming market - the IPO market in China before the collapse last summer.

Eight local banks have been approved by the project, and another five are waiting for government approval.

This trend should be partly attributed to the Chinese government.

Because the number of bad debts is expected to increase, the securities regulatory authorities have speeded up the examination and approval speed of the above banks' initial public offering (IPO).

By the end of 2015, the total amount of non-performing loans of the Bank of China has reached a record 12700 billion yuan (about 197 billion US dollars).

Bank IPO will help some of the troubled banks to get the money back up.

It will take a certain time to use deleveraging to resolve the bad debts of enterprises, and the debt will be pferred through the way of "debt to equity swap".

Therefore, for those troubled banks, the future will still be difficult.

Ideally, banks can release cash that has been used as a loan default buffer in the future by clearing bad loans from books.

But the stock market has its own inherent risks. As a bank, it can not take so many risks.

In fact, China has already established relevant laws and regulations to prohibit banks from holding corporate equity.

Under such circumstances, we must obtain legal concession to promote the implementation of the debt to equity measures.

Most analysts do not think this is a good idea.

Analysts in Bank of America said in a short report: "if the Chinese government provides more liquidity to banks to deal with non-performing loans, we suspect that this will lead to a more rapid accumulation of bad debts."

From our point of view, the use of liquidity is actually concealing solvency.

Therefore, we believe that if this unrecognized new policy is implemented, it will have a long-term negative impact on the market, especially for banks and Asset Management Co (AMCs).

In the long run, we are also concerned about the potential composition of China's complex banking industry in the future.

In other words, they worry that Chinese banks and enterprises will become a model, like zombies walking side by side, and can not really help each other.

This situation has happened in Japan, and they certainly do not want similar situations.

China does not have many choices on this issue.

If we do not deal with bad loans carefully, there will soon be a serious and huge debt default problem.

What can be done at present is to use these very ingenious ways of management to let these junk debts go to a place where they should go. This is the stock market.