STAFF NEWS & ANALYSIS
'I Trusted the Government Too Much'
By Philippe Gastonne - August 07, 2015

Investors throughout China are waiting for the government to step in and buy more stocks so they can close out their positions, but many are losing hope.

Yang Cheng, a farmer in the remote town of Panzhihua in southwest China, was one of many Chinese citizens who started buying up stocks after the government began promoting equity investment as part of a larger plan to expand the country's economy.

"When the market climbed to 4,000 points, I realized the risks were pretty high. However, public opinion on government policies affected my judgment," he told CNBC.

But after sinking his entire life savings—$164,000—and his relatives' money into shares of a local mining company, he lost everything. Not only that, but Yang's brokerage convinced him to borrow more than $1 million to buy stocks on margin. He now owes roughly what he originally invested after liquidating his portfolio.

Like many Chinese, Yang traveled to the office of the leadership and stock market regulator in Beijing to seek help, but was turned away.

"I don't know what to do. I trusted the government too much. I won't touch stocks again," Yang said. – CNBC, July 28, 2015

When farmers plunge their life savings into mining stocks at 6-to-1 leverage, it is fair to assume a bubble has formed that will eventually pop. That is certainly the case in China right now. Farmers like Yang Cheng made the mistake of believing their government. We suspect he won't make that mistake again.

Financial markets help a country's economy by, among other things, providing price discovery. The share prices established by buyers and sellers give everyone else important information on the value of listed companies. Yet the information loses its value when non-rational investors intervene.

In China's case, Beijing tried to boost economic growth with fiscal and monetary stimulus. Chinese businesses, seeing a drop in demand, declined to use the resulting liquidity to increase their production capacity. The stimulus money had to go somewhere. The country's capital controls meant it could not go outside China. The stock market was one of the few available investments, so shares prices quite naturally rose far more than was otherwise justified.

Farmer Yang and his peers no doubt thought they were being smart and patriotic to buy stocks. Having lived their whole lives in a communist society, the government had always taken care of them. Not this time.

While the loss must be painful, Yang seems to have learned a valuable lesson. "I trusted the government too much," he said. He will likely give future government promises a more skeptical hearing. This is good, because government rarely delivers on its promises.

This isn't a uniquely Chinese situation. Politicians around the globe make promises they can't keep all the time. Citizens around the globe believe them. The lucky ones learn their lesson early on and don't have to endure such huge losses.

If China is ever to have an even remotely "free market" economy, it has to stop intervening and let markets operate freely. If they had done so, it would not now be collapsing because it would not have gone so irrationally high in the first place.

Beijing apparently thinks it can maintain its tight grip on power and still enjoy the benefits of capitalism. They've done it surprisingly well so far, but eventually they will have to make a choice. Farmers like Mr. Yang won't be burned twice.

Posted in STAFF NEWS & ANALYSIS
  • esqualido

    He made a bet with 6:1 leverage and now he’s blaming the government? (he’d better spend his time reading Jesse Livermore)

  • Bill Ross

    …don’t trust them further than you can throw ’em

  • robert holbrook

    I understand the premise of this article and agree with much, but Mr Yang is simply the learning curve of an eventual lesson of the new communist economy. One which we have not seen, heard of or even Mr Yang who admittedly himself could scarcely fathom the idea of a collapse. China is entering a crossroads of no return.

    This is not a simple case of government intervention but fraud at the retail sector. He himself admits he leveraged his bets without governmental coercion. In fact, the Chinese government did not want the farmers of their country leveraged buying. While I admit after living in China and investing where I could, mainly in commodities, I was always aware of the possibility of my leveraged play. People like Mr. Yang regardless of how they accumulated have a lot of money. In fact I have never lived in a country except Cambodia that had more luxury cars on the road per cap. However Mr. Yang even admits in hindsight of my awareness but due to simple greed weren’t even considering the possibility of their vulnerable positions, yes partly because of communists beliefs but mainly the exuberant concept of greed and fraud. Both a relatively recent concept to both the investor and the retail sector. It is possibly the beginning of the end of strict communism as they know it.

    The fallout of mistrust in China will be the aggravation of the common worker in combination with the following. China’s problem as they see it has less to do with the fall of Mr. Yang and more to do with tribalism. Short of mass execution and slaughter of hundreds of millions of ethnic tribal members they have not figured out what to do with the tribes. They know what they would like to do, but they won’t, due to outside pressures and commodity markets since the tribes sit on a vast potential fortune of commodity finds. China has attempted tribal relocation with great failure.(Remind you of another country?) Their phony propped up real estate sector is mostly owned by the new emerging class so physical movement to this expensive inflated housing market is overpriced for relocation purposes and will be the next shoe to drop.

    It doesn’t take a raging genius to know, that with strict monetary controls, an export dependent market, a phony interior work force, a country with 3 currencies (yes, 3) tribalism and ghost cities as far as the eye can see, for one to figure out that hiding their hard earned savings under their Chinese Kang beds is a safer bet. Unless of course you are a product of controlled currencies, information and education, combined with self greed, retail fraud and the re-invention of a new communism. Poor Mr Yang and others are not only caught in the delusion of communist rule but are the beginning of the RED tulip market crash.Travel to the Office of Leadership? Come now Mr. Yang, you are starting to sound like a communist who wants to play the stock market without risk.

  • Martin

    I hope nobody gets sarcastic with the poor guy.

    Millions of pensioners from the former Soviet Union got a raw deal on pensions, after contributing all of their life, they got nothing worth talking about. You can still find them begging on the streets.
    In their case, they HAD to go along with the government.

    As for the US, it is different.
    Millions still have to learn what happens when you trust your government with things you should NOT trust:
    — Your Money (property) – taxes that only fund Greece levels of debt and the ensuing debt catastrophe
    — Your Liberty
    — Your Life (for those who survived government-approved Abortion, let’s see if they survive the upcoming Obamacare euthanasia death panels, unless if they are rich of course)

  • Bruce C.

    “… government rarely delivers on its promises.”

    That may be true in the long run but not necessarily in the short run, which is what makes all of these governmental systems so insidious.
    The timing of when they will start to starve the periphery, and the rate at which things will devolve, is hard to predict. How much longer does Japan have? Europe? the US? Things could muddle along for decades or collapse overnight.

  • Praetor

    Can we not marvel, at the fact, that people trust the government, any government. Mao’s, cultural revolution and subsequent leap forward, that took the lives of 30 to 40 million ‘plus’ or Stalin’s purge that took 10s of millions that really no one knows how many died or the millions killed by governments during the world wars or the civilizations killed off by the Spaniard’s on the quest to conquer the Americas or the native American Indians snuffed out by the U.S. Government and how many millions have the Brit’s killed in their lust for empire. Needless to say, without a shadow of a doubt government will kill you. Can we not marvel at that very fact, that people trust GOVERNMENT. It amazes me!!!

  • L Garou

    Every decent man is ashamed of the government he lives under”
    (H.L. Mencken)

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