Stock market advice for China: when in a hole, stop digging | World …
An investor watches market returns at a stock exchange hall in China, on Monday 27 July. Photograph: ChinaFotoPress/via Getty Images
Even by recent Chinese standards, the latest stock market plunge was spectacular. Nearly 1,800 stocks – or more than 60% of shares on the main markets in Shanghai and Shenzhen – fell by the daily limit of 10%, thereby triggering a trading suspension. If such a limit had not been in operation, who knows where prices might have settled. An 8.5% overall fall in the Shanghai Composite might have been 18.5% or 28.5%. Almost any guess is credible.
Related: Beijing’s desperate attempts to control the stock market will end badly
What was the trigger? The question misses the point. By intervening in the market in various ham-fisted ways – forcing state funds to buy shares, banning sales by big investors, pumping cheap loans into broking firms – Beijing has turned its stock market into a giant game of guessing how long such artificial props can be maintained.
Sooner or later, a big fall was bound to arrive because everybody knows – or should know – that valuations remain absurdly high. The Shanghai market, after all, is still up 70% year-on-year and is still stuffed with companies valued at 40-plus times earnings.
For the past three weeks, the Beijing authorities might have kidded themselves they had stopped the rot. The Shanghai Composite had bounced 17% from its low point at the beginning of the month. But half of that gain evaporated in a single trading session on Monday, demonstrating that fear in stock markets cannot be eradicated on the orders of Beijing.
It’s hard to know what the authorities will try next. Two limit-down days in a row would be an embarrassing demonstration of Beijing’s loss of control of events. But summoning heavier armoury, in the form of larger state-sponsored buying of stocks, would bring greater problems around the corner. Equally, another cut in interest rates would probably be counter-productive; foreign investors would conclude that monetary policy is being set for the stock market rather than for the real economy.
When in a hole, the traditional advice is stop digging. It’s a sound principle, and one Beijing will probably ignore.
Varoufakis’s plan B … B for barmy
At a push, one might say the government in Athens was duty-bound to work on a plan B in case bailout talks collapsed, liquidity from the European Central Bank was cut off, and Greek banks remained shut. But former finance minister Yanis Varoufakis’s idea to set up a parallel payment system suffered from two obvious flaws.
Related: Greece crisis: Yanis Varoufakis admits ‘contingency plan’ for euro exit
First, it required a crack team to hack into the public revenue office’s software to copy individuals’ tax codes. Varoufakis’s explanation is that the plan had to be kept quiet in case the dreaded troika of lenders got wind of it. OK, but the idea that a few individuals could design a robust new payments system from scratch, and in secret, is simply not credible. Payments technology and smartphone apps are not cheap or easy to develop – just ask any UK bank.
The second problem is even more fundamental. If the payments system had been launched, the creditors might have declared that Grexit had already happened on the ground. That would not have helped a Greek government still hoping for a deal.
Regard the tale, then, as a strange subplot to the Greek crisis, of which the oddest part is Varoufakis’s apparent belief that his secret plan could remain secret even after he had related it on a conference call to a bunch of hedge fund managers earlier this month.
GVC taking a gamble on takeover bid
An AIM-listed company worth £260m would normally struggle, to put it mildly, to make a £1bn takeover offer for a rival. So top marks to GVC, owner of Sportingbet, for getting this far in its attempt to defeat 888 and win the scrap for Bwin.party Digital Entertainment, the oddly named and badly performing combination of the old PartyGaming and an Austrian outfit.
Even so, GVC’s offer looks to be a stretch and a half. In its latest incarnation, the proposal is just 20% in cash, funded largely via a €400m secured loan from New York hedge fund Cerberus. The rest of the offer would comprise new GVC shares. There would be also be a separate share placing by GVC to raise £150m to fund restructuring.
That’s an awful lot of GVC equity to be digested. Maybe the appetite exists – GVC share prices fell only 2% on Monday – but it would be a brave Bwin board that switched its recommendation away from 888 at this point.
888’s offer could hardly be described as conservative, but it is putting slightly more cash on the table, which may be the critical factor in the end. The most likely outcome is the common-sense one: 888 adds a few pennies to its offer and Bwin’s directors stick with the bidder they chose the first time round.
Visit site:
Stock market advice for China: when in a hole, stop digging | World …
