Chinese stocks crash in major sell-off. U.S. Next?

I’ve been betting Chinese stocks crash soon because China’s stock market looked perilously high with a debt overhang that could break lose at any time. I’ve been saying the same about the U.S. stock market. A crash has been imminent for both, and now it may be starting in China.

To be sure, it is not yet a crash of the whole Shanghai-Hong-Kong market, but the scale of the plunge for a few prized, high-tech stocks is jaw-dropping. One of China’s stellar stocks, which had risen more than 600% in the past year, crashed overnight. I mean, came down out of the blue with a thud and a roar. So far, there has been no explanation as to why it dropped. No one saw it coming.


Which Chinese stocks crashed?


China’s wealthiest billionaire, Li Hejun, lost half of his fortune in one day when the stock of his solar company dropped by more than 50%. Today, the sell-off spread to other major stocks, practically burying another billionaire, Pan Sutong, whose stocks, which had climbed over 300% in the past year, nose-dived in serial fashion 60%!


Hong Kong’s securities regulator warned other investors to exercise “extreme caution,” as Hong Kong’s best-performing stocks this year are crashing…. Goldin Financial and Goldin Properties had risen 300% this year…. What goes up… crashes to [the] floor in a wealth-destroying frenzy… “It’s a contagion effect,” said Nick Cheng, chief derivatives trader at Liquid Capital Markets Ltd. in Hong Kong. Investors “are now rushing to take profit and everyone’s suddenly running for the exit.”

Hong Kong’s best-performing stocks this year are tumbling even faster than they rallied…. “Valuations are ridiculously high,” Castor Pang, the head of research at Core Pacific-Yamaichi in Hong Kong, said by phone. “The stocks surged too much and no one knows why.” (Contra Corner)


Easy come, easy go when everything is just driven by rampant speculation.

Li Hejun’s company, Hanergy Thin Film, is a high-tech solar energy company that makes flexible solar collectors. 60% of Hanergy’s sales were to its parent company, Hanergy Holdings, which is a solar and hydro energy company. Hong Kong regulators have been investigating Hanergy for market manipulation, questioning the legitimacy of reported sales to Hanergy Holdings.

Analysts, nevertheless, have said Hanergy’s crash is inexplicable, even after the fact; but investors shorting the market have been saying for a year that Hanergy is a manipulated stock with manipulated financials. Should it be any surprise to anyone knowing the Chinese market to find Chinese stocks have manipulated values?

Li has been saying that Hanergy Thin Film will begin producing solar-powered cars in October, claiming they will be able to go 100 kilometers (about 60 miles) on a four hour charge from the flexible film that will cover their bodies. Li had developed partnerships to build catering trucks and recreational vehicles. He also had his eye on the sky, talking about NASA satellites. But Li failed to show up to his company’s annual meeting yesterday.

Another unproven technology company making big claims bites the dust, losing $18.6 billion of hyper-inflated value in half a day! Another Chinese solar company, Yingli Green, can you buy ambien at walmart fell 37% the day before.

Morgan Stanley is no longer bullish on the Chinese stock market either, downgrading Chinese stocks for the first time in seven years due to their being overvalued. BNP Paribas is also selling off many of its Hong-Kong Chinese stocks due to the margin of debt taken out by investors to buy those stocks. An overhang of debt gives cause for even more fear when things turn downward because investors may lose more than all the money they had. So, it raises the prospect of a panicked sell-off.

Arthus Kwong, who heads of Asia Pacific equities at BNP, feels that investors are obsessively focusing on the influx of new money (Q.E. style) from China’s central bank, yet Kwong finds that telling people to be careful is an unpopular message.


How long will it be until stocks crash in a similar surprise in the U.S. market?


If Chinese stocks crash overnight, so can U.S. stocks, which are also overvalued and pumped up by the central bank. A U.S. stock-market crash will come as no surprise to me, but it will to many who are not listening. So many things about our economy are so fragile. So many of its past sins still plague us as continuing present sins that we are by no means immune to the same kind of tumble from overpriced stocks.

The fall can be worse than the stock’s overvaluation merits when fear enters the equation and amplifies the outcome. There is a strong likelihood the whole house of cards will come down in China. There is in my mind an equal likelihood of something that is just as unexpected in America, especially if something like a Greek default happens or some other big “black swan” event triggers a panic just as some things are giving way. When the cornice breaks off, it is likely to create an avalanche. Who knows, for example, what weak institutions might fail if Greece defaults, and then who knows what failure of those institutions will mean to other weak institutions?

Since the U.S. economy is as unstable as it has been at any time during the Great Recession, I moved our own retirement funds to cash, rather than waiting for the fall to begin. I’d by gold, but the retirement funds don’t have that option. Once this kind of overhang breaks away, it can be hard to get out of the way fast enough. I’d rather lose a little possible remaining gain than battle to get out in the middle of the cascade. Those who wait to the last minute are usually the ones who are engulfed in the slide.


[And, another day after publication of this article, the march goes on: Joyou AG – the Chinese affiliate of Grohe, a German bathroom manufacturer  – fell from record highs last week to bankruptcy today when it was found to have played with its balance sheet. And anyone who understands the corrupt nature of Chinese business, knows there is a lot of this among the companies that are still priced high in the market.]

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