Why the Latest Stock Rally in China is a Dangerous Trap

Hello. Hi. Hi, everyone. Welcome to Lazy Wheel Talk. Oh, I think my camera is crooked. Let me move this. This is better. Yeah, that's much better. All right. Sorry. Okay. All right. How's everyone? I delayed the start of this live stream to avoid confrontation. I mean, outcome what I'm saying, competition, avoid competition with the vice vice presidential debate. I haven't, I haven't watched it. I was deep into stocks and analysis tonight. So yeah, today's October 1st, it's the 75th anniversary of the founding of the PRC and Xi Jinping surprised everyone last week by ushering in an economic stimulus plan. And it has resulted in an unbelievable surge in China stock market. Even wall street veterans are impressed today. Let's discuss why I think the latest stock rally in China is a dangerous trap. Okay. So the most eye catching part of the plan was that there was a joint press conference organized by governor of China central bank and the chairman of China's securities regulatory commission and the director of China's financial regulatory administration. So on the morning of September 24th at 9am 30 minutes before the stock market opened the three heavyweights of China's financial regulatory authorities hosted a rare joint press conference to announce stimulus policies. And the new policies can be summarized in three bullet points. I'm sure you have heard about it by now. First is lowering bank reserves and releasing 1 trillion yuan into the economy and possibly up to 2 trillion by the end of the year. And the second is cutting interest rate. And this includes lowering mortgage rate on existing housing loans by half of a percent, and also lowering the minimum down payment ratio from 25 to 15 percent. Last but not least, it's boosting the stock market by allowing financial companies like banks and insurance companies to borrow from the central bank by using their stocks as collateral to buy back shares and raise stock values. As a result, China's stock market soared in a manner that has not been seen before. In a week, the Shanghai Composite Index rose 22 percent from 2863 points on September 24th to 3336 points on September 30th. The Shenzhen Composite Index rose 29 percent from 1495 to 1927. And the craziest day was Monday, yesterday, the day before China's national holiday begins or began. So yesterday, Shanghai Composite Index grew 8.3 percent and Shenzhen Index grew 10.6 percent. I mean, in a single day. And the trading volume for China's three stock markets combined reached over 2 trillion yuan. It's the first time in nine years. And all sectors surged with no declining sectors. Leading the gains are software development, energy metals, I should say energy and metals, securities, and guess what? Real estate. Yes, you heard it right. Real estate. So those industries led, those sectors led the, had the biggest gains. Nearly 20 stocks in real estate sectors, including Wanke and Greenland Holdings rose so much that they hit the daily price cap limit and had to halt trading temporarily. And according to wind statistics, a total of 5307 stocks rose across three stock exchanges. So 5307 stocks rose and only 29 stocks fell and 12 stocks remained flat. This means 99.2% of stocks rose and less than 1%, it's only actually 0.8% of stocks either fell or remained flat. And of the 5348 total stocks, 35% of them saw gains of over 9% and there's no stocks had losses of more than 9%. So with help from state media, the authorities heavily promoted the arrival of a bull market. Now China has 220 million retail investor accounts. 90% of them were inactive before the surge. This is because they were losing money. 90% of them lost money in the past several years. And many of these accounts in the last week became active again. And many new players enter the market, leading to a surge in trading volume. And yesterday, 35 minutes after trading opened, the total transaction volume of the Shanghai and Shenzhen stock exchanges exceeded one trillion yuan and setting a new record for the fastest one trillion yuan turnover in history. OK, so now Chinese media, as part of its propaganda or promotion of the bulls market, did some calculation. It basically said that in just five days, total market value of A shares increased by approximately 17 trillion yuan. And about a third of that is owned by retail investors. Now, there are 220 million retail investors. So if you do the math, on average, each retail investor saw their portfolio grew by 26,000 yuan. Someone was trying to correct me on how to pronounce the word thousand. I think I did it right. Not thousand. Thousand. OK. Good tongue twister. Thousand. Each retail. Yeah, so they saw their portfolio grew by 26,000 or it's thirty seven hundred US dollars. So that's how much money they made in five days. Chinese media reported the surge in new accounts, in new account opening as tidal waves. Brokerage firm branches are packed with people opening new accounts and kept growing. And interestingly, they reported that 70% of the new investment accounts opened last week were from Gen Z. People who were born in the 1990s and the 2000s. That's very interesting. Now, after being suppressed for months, if not years, without hope to see any financial prospect, the Chinese suddenly feel that they are seeing the light at the end of the tunnel. I think in a normal society where people have the freedom to choose their investment options or where the market is healthier, people wouldn't respond, you know, with this kind of a craze. But in a in a in a highly controlled totalitarian society where you do see some elements of the market economy, then, you know, when people have no hope of making any money, then all of a sudden they see, you know, the performance of the stock market. And that's why they turn it in or turn in on the stock market. And discussions about stocks can be heard from grannies, grandmas at supermarkets to young men doing deliveries. So and then Chinese media embellished the stock rally as life changing moment for many. So one person said on the Internet, posted this. He said that with the bull market, our family pulled together over five million yuan and we made three million yuan in just a few days. And he said, after this bull market, I expect to to achieve financial freedom. So I won't be I won't be writing book anymore. I mean, he's I think he was planning to write an Internet novel to make a living. But he said that changed the plan. And another person exclaimed, it really happened. Free money because people made the money so fast, they call it free money. It's like money just fell from the sky. Now, when when we see the the Chinese state media, the state and people are sharing something in unison. We know something is wrong because it's too good to be true. And unfortunately, in the past three decades, the actually I have I should show you this. I should show you the slides. Where are the slides? I have slides. Sorry, I have some graphs I prepared for for this talk. Here we go. I'll be showing some curves. One month, it's still uploading. All right, it's still uploading. Only four slides taking so long. Anyways, unfortunately, in the past three decades, China has has learned many aspects of a market economy. But Chinese people, many of them don't quite understand the that the essence of a they don't understand the foundation of a country's financial market is its real economy. Now, here we go. I mean, let me add to stage. Can you see that? So this is essentially. The curve for the Shanghai and the Shenzhen composite indexes, which are the main indexes in the country for the past month. You know. Anyways, so let me come back. So a lot of people, they don't understand the essence of a market economy. They see financial market purely as a place where money can generate money and stock market as sort of like a gambling place when they can make quick money without doing much. You can't blame them because in psychology, people say that losing money turns people into gamblers. Winning money doesn't make people gamblers. So 90 percent of China's retail investors have been losing money due to the controlled nature, the manipulated nature of China's stock markets. And in the past four years, the bear market has created hundreds of millions of gamblers in China. And the CCP has utilized this gambling mentality of China's massive retail investors and turn it to its favor. So the latest rally isn't driven by confidence in the real economy. It's driven by emotions and policies. So to drive emotions, the CCP played its trump card right from the start, which is that it has its central bank directly back the stock market. The China's central bank has allowed financial institutions and large public companies to use its stocks as collateral to borrow money from the central bank to buy back its shares. And someone used this analogy, and I think it's very, very visual. He said that he called this elevation through pulling one's own hair. We all know that we can't go up by just pulling our own hair. We can't go up by pulling ourselves. You need some kind of external force to pull yourself. But in this case, yeah, they say it's magic. The whole design is you move up, you elevate by pulling your own hair. And then this leveraged buyback is highly risky because it reduces the company's profitability. We know many of Chinese public companies have profitability problems. And also, it's highly risky if stock prices fall. Now, by lending money to selected financial companies to buy back their stocks, China's central bank lost its independence and essentially has become a commercial bank. So some call CCP's stimulus plan, this plan to boost the stock market crazy, because it's essentially forcing a dying patient from ICU to attend a dance party. He or she is all dressed up to attend a dance party. And the result is that, or the result will be that, will be the demise of the patient. Now, not everyone is a gambler. Those who are part of the casino operations certainly know the game of making money. Now, from September 22 to 28, the major shareholders of a large number of publicly listed companies reduced their holdings. And this is reported by China's own media. There was a total of 280 assurances of announcement by these stakeholders of selling shares because they are major shareholders. I mean, they have to file with the security regulatory agencies when they announce selling their shares, right? So there are 280 such announcements. And some transactions were actually completed during the stock rally. And Sina, Sina, you know, Xin Lang Wang, its English name is Sina. Sina Finance reported on September 29 that 146 public companies issued stock announcements, a stock sale announcement. So 146 publicly listed companies filed announcements or filed notice with the regulatory agencies to announce, to announce or to inform the public that their major shareholders was selling shares. And that all happened in that week, the last week. And major and then by their major shareholders or controlling shareholders or person acting in concert. And these are the these are the people who have sold large shares last week during the market rally. And this Sina Finance article bluntly questioned these people's motives. And it says, the market has only been rising for a week and these companies can't wait to cash out. I mean, I think by saying these companies, the author really meant these individuals controlling these companies can't wait to cash out. The central bank has provided 300 billion yuan to encourage stock buyback, yet we're seeing a sell off instead of buybacks. That's interesting. So instead of giving money to its citizens to spend and thus stimulate the economy, the CCP did the opposite, right? I mean, in normal economies, governments would give money to the citizens to have them spend to stimulate the economy. But the CCP did the opposite. It wants to attract the money from its citizens, their hard-earned savings and retirement funds. The government wants to attract their money into the stock market and the real estate market to boost the economy and saving the regime's face and buying its time. So it's completely the opposite. So in China's system, the government never equates the livelihood of your economy to the well-being of its people. It never understands that equation. When your people are well off, then you have a strong economy. When your people suffer, you can't have a good economy. It doesn't see it that way. Its economy is whether or not the market looks good, whether or not its currency is strong. By the way, China's currency is oddly doing very well against the yuan. And people wonder why, because in theory, Chinese yuan should go weaker, right? Because the central bank reduced the interest rate, but it's actually going stronger. And the only reason is the CCP wants to save its face. It's a political agenda. Anyways, so their goal is completely the opposite. And the ones who will actually benefit from the so-called stimulus are those who control the financial market. I did a chart. If you look at the chart showing the historical trend of China, this is the Shenzhen Composite Index. I mean, it's full of spikes. And it's flat. It didn't really go up. I mean, from 2005 to 2024 now, and it has been good 20 years. But if you look at the trend, it doesn't have an upward trend. It doesn't have an uptrend. And here's the Shanghai. I mean, it's a little better. It does show a slight uptrend. After every major surge, there is a crash, like in 2015, and then 2008, 2007. Yeah, 2005, I think, in this case. And it's full of spikes and valley. That's the nature of China's stock market. So every time it goes up, and then it falls down. And if you could compare these with, here's NASDAQ and New York Stock Exchange. I mean, for NASDAQ, it's lifetime from the 1980s. I mean, there are peaks and valleys. But overall, you see a very consistent upward curve. I mean, there are ups and downs. But it's nothing like the Chinese stock. Look at this. So every time there's a dramatic surge, any dramatic surge is followed by a crash, a market crash. You can pretty much say that. And that's why people fear that. I saw people discussing how long they think this surge will last. The answer is from one month to three months. No one believed that this would last beyond 2024. Nobody believed. I mean, these are all economists, people based outside China. Nobody believed that it will last more than three months. Some people believe that it will last only one month, and then it will start to crash. And then when that happens, the people who will lose money are the retail investors. Now, back in April 2019, China Construction Bank and Boston Consulting Group jointly released a report called China Private Banking 2019. The report estimated that China's total household investable financial assets totaled 147 trillion yuan at the time. Now, the CCP started this unanchored money printing to pump up the stock and real estate markets in an attempt to attract the 147 trillion yuan from the public. By pumping money into the stock market and then the real estate market, its ultimate goal is to attract a big portion of that 147 trillion yuan private wealth or household investables into the stock and real estate market. And this money, the investment, would take over bad assets in real estate and stock. So even if a third of the 147 trillion yuan enters the market, or even a quarter, it could delay CCP's financial crisis. And people say, judging by the current situation, the strategy so far has worked because many families have been taking out their savings, hard-earned savings, and entered the stock market. Because you have to understand their psychology. They live in an environment with very limited information, and they don't have a lot of choices. And so if they see an opportunity, it's like gambling. But it looks pretty promising, so they want to take that gamble. Now, unfortunately, during the process, state-owned financial institutes and large SOEs' interests will always be protected. On September 27, Shanghai Stock Exchange was hit by a trading glitch in the morning. And it started at 10, 11 a.m. The stock index remained a straight line, and the system was not responding to trading activities and was abnormally slow. It lasted almost two hours, and many people blame it on the large trading volume on that day. They say the amount of investors crashed the system or overwhelmed the system, so it didn't react. However, many people don't believe that's the case. And the only other time that this type of technical glitch happened was during the crazy market surge right before the 2015 crash. Remember, there was a surge in June, right around Xi Jinping's birthday. It was before his birthday in June. There was, you see, that spike. And during that period, the same type of technical glitch happened. But somebody compared the trading volume, and they say that it cannot be because the trading volume on September 27 this year was only 700 billion yuan, whereas in 2015, when the crash happened, the trading volume was 1.2 trillion yuan. And also in 2015, that's 10 years ago, hardware, software, and network bandwidth was much smaller than today's system and network. And so the analyst said that the Shanghai Stock Exchange should be able to handle trading volume up to 3 trillion yuan. So he does not believe it was triggered by a technical, by excessive trading volume, or by the overwhelming trading volume. He believes it's a man-made decision. It was a human decision to slow down the system. And now why would the stock exchange want to slow down the system? There are two reasons people gave. The first, of course, there are speculations because we can't prove. We can't prove if that's exactly the reason. But they're very logical. I mean, there's certain logic behind them. The first was that the authorities somehow wanted to drive traffic to the Shenzhen Exchange. They felt like the Shenzhen Exchange was not getting much of the attention as the Shanghai Exchange did. So they slowed down trading volume on the Shanghai Exchange. And that pushed the money to Shenzhen. And on that day, at the end of the day, the Shenzhen Index grew. It was 6.7%, and the Shanghai Index grew only a 2.8%. So much of the capital went to Shenzhen. So that's one possibility. And the other speculation is that some short sellers were getting crushed, leading to a short squeeze scenario. And the short seller is no other than CITIC Futures. CITIC is one of China's top financial institutions, and it's backed by the state, Zhongxin, right? Here, I can show you this. Oh, yeah, this is the post. This is the post that was circulating on China, where they said that the short sellers, CITIC Futures, lost all of their earnings in short selling for the year during those three days. And it amounted to 6.6 billion yuan. And this was discussed by Chinese state media. They're not pure hearsay. They're actually discussed and debated by Chinese media. And some claim that CITIC Futures couldn't stand the losses and pull the plug of the trading system. And records show that CITIC Futures ranked number one in daily losses that day, with a reported loss of 6.63 billion yuan on September 27. So in response, CITIC Futures stated that the short selling did not belong to them. It's not their positions. They said it was from their clients. And experts pointed out that, now, it couldn't be retail investors. If it's from other clients, it would be another institutional investors. Because the retail investors don't have the financial resources to, I mean, to buy that kind of a short positions, right? That the deposits was like 530 million yuan. I mean, it has to be institutional behavior. It cannot be retail. Nobody has that kind of money. So if it's not CITIC Futures, then it's another institution. But Chinese retail investors hate short sellers. So, yeah. So basically, so what people said was, what was disclosed was that CITIC went, after they lost 3. I mean, 6.6 billion, they went for a negotiated liquidation to close out the positions. And therefore, the trade, the exchange cooperated by slowing down the system. If you think about it, that's how manipulated China's stock market is, because it's all controlled by the government. The stock exchange is controlled by the government. The financial institutions are controlled by the government. And so, then you never know the real reason of these, quote unquote, technical glitch. However, what's surprising, and these are all discussed by Chinese investors. There were just so much data and analysis and good insight on Chinese media. And they're not just rumors. They're really credible financial media outlets that discussed what could really be causing the glitch. However, Wall Street investors, mainstream American media didn't remain quiet. Wall Street investors responded positively to China's abnormal stock rally. One of Goldman Sachs managing director, I think his name is Scott Rubner, said that in the past 48 hours, not from now, from the time he posted, he said, I have had more Zoom calls about China than in the entire year of 2024. And he mentioned that investors are increasingly worried about missing out on the surge in China's stock market, showing signs of FOMO, fear of missing out. And then last Tuesday, Goldman Sachs prime brokerage recorded the largest single day net buying of Chinese stocks since March 2021. And it was the second largest net buying of Chinese stocks in the past decade. And this wave of A share market gains has also driven up Hong Kong stock market. And then also the stock prices of Chinese companies listed overseas. American billionaire and chairman of, I think it's called Apalusa? Apalusa management hedge fund. His name is famous. David Tepper. He said he's very optimistic about China's stock market after the recent rate cut by the, oh, what's going on? Fire. Stop. I don't know. This fire, it goes off automatically. There's obviously no fire. Okay. So David Tepper, a firm believer in value investing, now believes that China's stock market is in a different game. And he said he bought all stocks related to China. And a strategist working for Bank of America, her name is Winnie Wu, believes that this is the first time the Chinese government has encouraged the use of leverage to invest in the stock market. With leverage driving the market, there's still significant room for further growth in the stock market. I don't know how much growth there is. But if there is, and I don't know how many people can actually turn that into a positive return on their portfolio. I don't think there's a big window of time. China's central bank's operation is essentially a covert plundering of trillions of yuan from the public, redistributing it to state-backed institutions through the stock market games. And in other countries, like in the United States, they say they rob the rich to help the poor. But in China, it's the opposite. They rob the poor to help the rich. Massive money printing and liquidity inevitably lead to a stock market surge. But it has nothing. So it has nothing to do with a bull market or the growth of the economy. It's entirely the result of manipulation. I think like the saying goes, whom the gods would destroy, they first make mad. I think that's where China's stock market is right now. So don't be fooled. I think this is the last chance for China's retail investors to quit. This is not the time. This is the time to exit. This is the time to sell. Otherwise, it will be too late. That's all I will say. All right, I'm sorry about the fire alarm. I don't know why it has been going off more often, even though there's nothing. There's nothing going on. Okay, all right, let's see. I hope this is helpful. It's my homework for the past weekend. I've been trying to get to the bottom of this stock market surge. So I'm glad that I'm able to offer you some insight. Don't be fooled. Yeah, all right. I see some stickers coming my way. Let me see what people have asked me. Brian Cowell. Well, thank you, Brian, for the generous sticker. Charles Womack, 888. How auspicious. These people buying Chinese stocks should first study Xi Jinping thought. They will find out about stocks with Chinese characteristics. But the problem is, if they studied Xi Jinping thought, they would accept whatever the government tells them. Sorry, I have to take a sip. They probably have. If they study Xi Jinping thought, they have been brainwashed by that. See, when you're brainwashed, you don't know what you don't know. That's the sad part of it. If you talk to a young Chinese person, their aspiration is to study finance. This is because all the princelings or the children of the government officials all went into finance. They control some kind of financial institution. And then because of that, because the general public follow what the princelings do. And so they see all the children or grandchildren of the government officials all go into finance. So they think that's a good field to get into. So as a result, I think China is, the entire Chinese economy is overfinanced. They're overleveraged. Because they play the financial instrument as if it's a standalone industry. But it's not. Without the real economy as its foundation, what would the stock market do? It's an empty shell. But they don't look at it that way. They think it's an industry that stands by itself. And as long as you know how to play it, you can make a lot of money. That's what Chinese people believe. So it's very sad. But now it's coming back. But unless you are a princeling, or you are somebody born into an official's family, or you have the privilege to get insider information, otherwise your chances of making money in that kind of environment is very small as an ordinary Chinese. Jeff Rammels, Chinese stocks are on fire. Maybe that's why the fire alarm goes off. So Cass, maybe. Wow. Okay. I don't know. I hope not. All right. Let's see. All right. That seems to be all. It's too bad. We're living in the cream color. Very good taste. All right. Four more rules the day. Let's see what other questions people have for me. In the cream color, it's too bad. We're living real world with synthetically controlled simulation. Synthetically controlled simulation. In the U.S. economy, to be honest with you, I'm not so confident in the U.S. economy either. I'm really concerned about the union strike with the port workers, right? I don't know. Dozens of U.S. port on the East Coast. The workers there are on strike. I think this is a serious disruption to supply chain, and I think it will affect pricing. And I'm really concerned. And I think this could be the start of a series of events that are disruptive to U.S. economy. So although the problems we have here is much smaller than the one they have across the Pacific, but I'm equally concerned because things shouldn't go that wrong over here, in theory, because we should have a more robust system in place. But if people are not doing their jobs, if analysts are not being honest, and if politicians are only interested in political wings and not interested in working for the voters, and if regulatory agencies don't do their job, surveilling, monitoring these activities, then we will have similar problems as China does. So I'm equally concerned. Let's see. William Shakespeare. No, Shakespeare. Well, Lei, that point is definitely true. The stock market is an industry itself, and it is possible to make money as a trader, but most people don't, especially 85% of traders lose. Because, I mean, if you really understand the nature of stock market, you have to work counter-intuitively. Because most people will, you have to stay ahead of people. You have to do the opposite of what other people do. When you follow what other people do, you're going to lose money. But most people who want to speculate in the market just follow the crowd, and that's why they lose money, right? So you always have to do the opposite. When others buy, you sell, and then you buy when other people sell. So that's why it's always a small amount of people who make money, and the majority of people don't. But the reason we see our stock markets have surged so much is because the amount of money our government has printed, right, the amount of money the government has printed has gone into the stock market. It's not necessarily the result of the economic growth or the ability of a portfolio manager. There's just so much more money out there, and something has to grow, prices or the stock or something. But essentially, if you really think about it, it's only a small percentage of people who can actually make money. We think our retirement fund has grown or our portfolio has grown. That's inflation. I mean, our money is not worth as much as it used to be. So that's how I look at it. All right, Ray Ward. Do you think small countries should join BRICS? Is the yuan and the ruble likely to be a reliable currency of international trading? Absolutely not. I can speak for yuan. Yuan is not tradable, right? It's not freely traded in the international market. And so that's one. And also, it's going to devalue because the central bank is now going to print money. Before, it's pegged to the US dollar. Now, it's just going to print since its announcement in August that it will be in... So I don't even... I think in three months, with the way things are going in China, I think three months from now, I think the world will be a different place. I seriously think that. With this kind of craziness going on in China's economy, I don't know where things will be three months from now. And when China's economy tanks, it will affect the rest of the world. It will affect the supply chain around the world. So we will all be affected. So three months from now, we'll revisit this topic and see if I was wrong. I hope I'm wrong, because I don't want... I don't believe that we deserve another economic recession like the 1930s. But it's hard to say with the way things are going. But it's very sad that many of the Wall Street veterans are not telling the truth. The only two possibilities, I don't know what you think. Either they're not very smart, they just blindly follow what the CCP is saying. Or the second thing is they're very smart. They know exactly what will happen. They know exactly what they're saying is not true. But yet they still decide to deceive us. It's only either or. I don't know which case it is. Anyways, Brian Cobb. Here's $10 for a new battery or alarm. When such an alarm beeps for no reason, it's because the battery is old and the alarm has aged out. But I put in new batteries a while ago. Yeah, I put in the batteries when I moved in, which is only a few months ago. So I have no idea. I have to have that checked. It has been going off quite a lot in the past couple of days. I need to look into that. All right. That's all. Thank you very much. I will see you later in the week. All right. Bye-bye.