Courtesy of Mish.
Prop Up Failure
After futile attempts to prop up its stock market bubble, China stood back and did what it should have done in the first place: Let gravity take over.
The Financial Times reports Beijing Capitulates After Spending $200bn to Prop Up Equities.
After spending about $200bn buying shares to prop up falling equity prices over the past seven weeks, Beijing capitulated to market forces on Monday by choosing not to intervene as the benchmark Shanghai Composite Index fell 8.5 per cent.
The fall was the worst since February 2007. But unlike on most other days since the government launched an unprecedented effort to reverse plunging equities last month, the “national team” of state-owned stock buyers did not jump in to support the market.
Beijing’s leaders appear to have belatedly decided it is too expensive and ultimately futile to fight gravity in the equity market, especially as the government is now intervening separately on a massive scale to stop its currency from devaluing further.
Since the People’s Bank of China devalued its currency and introduced a new “market-oriented” foreign exchange price-setting mechanism on August 11, it has had to spend as much as $200bn of the country’s foreign exchange reserves to prevent the renminbi from falling more than it wants, according to people familiar with the central bank and its market interventions.
The scale of the intervention in both equity and currency markets has led many to question whether the Chinese authorities are in control of the situation or whether they have made a series of policy blunders.
“The problem they have now is that they’ve spent as much as $400bn supporting the currency and stock market and they are now worse off than when they started,” said one person with close ties to the PBoC. “I think they got overconfident and underestimated how strong the global reaction would be to the devaluation.”
Swiss Bank Lesson
Please recall the Swiss National Bank effort to prevent the Swiss Franc from becoming too overvalued.
The central bank pegged the Franc near the 1.20 Euro mark and pledged to defend the price at all costs.
But when ECB president Mario Draghi unleashed a huge QE program, the peg became too costly to maintain….
