Ping An Insurance, one of the most successful Chinese equities in the past year (until this summer), has a problem.
Lufax, its p2p lending company.
The growth and profitability of this platform has been carried by the BitCoin and broader cryptocurrency bull market. In fact, it can be argued that cryptocurrency speculation made Lufax successful.
Lufax: Financing Degenerate Gambling
Call it culture, call it tradition: Chinese love risk. In fact, gambling is part of some major holidays, such as Chinese’s New Year. The Chinese verb to “invest”, as we know it for the typical retail investor, is actually, “to play”. As Buffett remarked this summer, the Chinese equity markets resemble an actual casino.
Lufax IPO: Systemic Risk for Beijing
The Chinese government knows very well that Lufax is Ping An’s “bad bank” for BitCoin speculators.
That’s why the last thing Beijing wants is to compound any more contagion from a BitCoin crash.
Another bull-run in Lufax, followed by a crash in both Lufax and BitCoin, could engender mass-panic and expose China to systemic banking risk and foreign exchange losses.
This explains why the Lufax IPO was mysteriously delayed: Beijing needs the crypto-market to cool-off.
In the End, Mafia Beats Nerds – Every Time
Ping An claims that its proprietary machine learning algorithms give it an edge.
Edge or not, the money, right now, is in BitCoin.
There are no machine learning algorithms available that can match the profitability of loan-sharking against a bubble: the returns are too good to ignore.
Furthermore, China’s inherently unstable, especially at the top: this creates a very short investment horizon for politically-sensitive management. Any market promising fast and simple short-term gains will always compel Chinese managers and speculators to participate.
Seen Before: Chinese Steel Mills and the Nickel Bubble
During the nickel bubble of the mid-2000’s, nickel prices reached such high levels, that even Chinese mining majors publicly warned that they were unsustainable.
That did not stop the Chinese steel mill managers from using company assets as collateral for margin loans in nickel trading. Some mills went bankrupt, and there were a rash of “suicides” of managers who defaulted on their “margin call”.
Navigating the Crypto-Crash
China must carefully navigate deflating the crypto-currency market: any careless or thoughtless moves could induce a systemic risk event.
The seriousness of cryptocurrencies engendering system risk in China is clearly elucidated by Beijing’s refusal to list Lufax on its domestic stock markets: a large, liquid, high-profile p2p lender, which could easily collapse in a BitCoin crash, proves intolerable to a government trying to maintain social unity and stability in the face of never-ending political purges and unrest.