Over the past few years, we have written many strange stories about China’s often-ridiculous, perpetually-bubbly, always on the precipice financial system. The story about China’s literal “cash cows”, however, is by far the strangest.
As everyone knows by now, the primary reason the global equity market, taking its cues from the US, is where it is now is due to a relentless stream of debt-funded stock buybacks. Earlier this year Bloomberg stumbled on the same thing we have written since 2013, namely that “there is only one buyer keeping the bull market alive.”
And, as it turns out, even China figured it out. There is only one problem… well two:
The first is that to buyback your own stock, a company needs to generate a substantial amount of cash flow which can then be used to directly buyback your own shares (making management/shareholders who use corporate cash flows to make themselves wealthier in the process). Unfortunately most Chinese companies, many of which are stunning case studies in fraud, have a glaring problem when it comes to actual profitability and generating cash flows. The second problem is that unlike in the US, following the recent (and now largely burst) corporate bond bubble, issuing bonds to fund buybacks – and in general lending to risky companies – appears to now be rather frowned upon in China. So in the absence of these two necessary conditions, how is a Chinese company to boost its stock price by buying back its stock? The answer, as it turns out is cows, and specifically a cow sale-leaseback transaction.
This post was published at Zero Hedge on 05/26/2016.
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