On the heels of Central Banks announcing Global Coordinated Liquidity Measures, China and Russia have both announced plans to intervene directly in the equity markets.
Let’s take a look at both countries starting with Russia Pledges $20 Billion for Stocks, Cuts Oil Tax.
President Dmitry Medvedev pledged $20 billion to support the Russian stock market and cut oil taxes to stem the country’s worst financial crisis in a decade.
Medvedev ordered the government to “immediately” consider committing as much as 500 billion rubles to ensure “the stability of the stock market,” which was closed after the Micex Index lost 25 percent over three days. Russian shares traded in London surged and the interbank lending rate plunged.
The government will slash duties on oil after the decline in crude from a record hurt exporters and reduced revenue. The president’s intervention followed a meeting with central bank Chairman Sergey Ignatiev and Finance Minister Alexei Kudrin. Ignatiev also relaxed reserve requirements for lenders because of the turmoil in global markets and an estimated capital flight of at least $35 billion following last month’s conflict in Georgia.
“If no unexpected horrors happen, all these steps will defuse the problem of trust in the system,” said Katya Malofeeva, chief economist at Renaissance Capital in Moscow. “The big state- run banks still have lots of liquidity, but it was not spreading down through the system.”
Some of Russia’s 1,200 banks will go bankrupt, said Richard Hainsworth, chief executive officer of RusRating, an independent bank ratings service in Moscow. “It will be inevitable, but not as many as some people say.”
Ignatiev also pledged yesterday to keep the ruble steady within a trading band against a basket of euros and dollars as the global crisis and declining oil prices affect Russia.
The central bank sold about $3.3 billon last week to prop up the ruble, according to estimates by Evgeniy Nadorshin, chief economist at Trust Investment Bank. The ruble gained 0.6 percent to 25.278 per dollar today.
Expect Unexpected Horrors
The Russian stock market would not be acting this way unless something serious was lurking.
China To Buy Bank Shares
China is in on the act as well. Please consider China to Cut Stamp Duty, Buy Bank Shares, Xinhua Says.
China will scrap the tax on stock purchases and buy shares in three of the largest state-owned banks to shore up investor confidence in the world’s second worst-performing stock market this year.
China Investment Corp., the nation’s $200 billion sovereign wealth fund, will buy stakes in Industrial & Commercial Bank of China Ltd., Bank of China Ltd. and China Construction Bank Corp., the official Xinhua News Agency said in an announcement today. The 0.1 percent stock transaction duty will be removed for purchases and levied only on sales starting tomorrow, it said.
The CSI 300 Index slumped 64 percent this year as an equity bubble deflated and the economy slowed, undermining earnings growth. Industrial & Commercial Bank of China yesterday ceded its position as the world’s most valuable bank to HSBC Holdings Plc after shrinking by $241 billion in less than a year.
“The stock market has fallen too much,” said Frank Gong, chief China economist at JPMorgan Chase & Co. in Hong Kong. “There will be more measures to support the economy, like fiscal stimulus and easing of monetary policy.”
CIC’s unit Central Huijin Investment Co. will begin buying shares in the banks in the secondary market immediately, according to the Xinhua announcement. The agency didn’t say how much Central Huijin, which already controls the nation’s largest banks, may invest or give further details.
“This move signals the government’s more proactive approach towards restoring market sentiment,” said Jing Ulrich, Hong Kong-based chairwoman of China equities at JPMorgan.
This move signals proactive stupidity.
Government intervention in the stock market can never work. Buying shares in insolvent companies headed for bankruptcy will never make those shares worth anything no matter how many shares the government buys.
Whatever the natural price level of any equity, if the government, any government offers to buy shares above that price, there will be an unlimited supply of stock until the government owns every share.
The only question now will be how long it takes before some idiot in US Congress proposes to do the same thing. Arguably House Financial Services Committee Chairman Barney Frank has already made such a proposal when he stated “The next step is to begin to consider that question [of what assets are worth]” because “the private market won’t even go to a fire sale.”
See Senate Majority Leader Reid: “No One Knows What to Do” for more details.
Mike “Mish” Shedlock
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