7/23/2015

China'sstockmarketcrash:Aredflag|TheEconomist

China'sstockmarketcrash

Aredflag
Jul7th2015,9:36BYS.R.|SHANGHAI

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CHINAiscertainlynotthefirstcountrytotrytopropupa
fallingstockmarket.Thecentral
banksofAmerica,Europeand
Japanhaveallshownformin
buyingsharesaftercrashesand
cuttinginterestratestocheerup
bloodiedinvestors.Butthe
circumstancesandthemannerof
Chinasinterventionofthepast
tendaysmakeitanoutlier,
worryinglyso.
ThetriggerinChinascaseisperplexing.Yes,thestockmarketisdownathirdoverthe
pastmonth,butthathassimplytakenitbacktoMarchlevelsitisstillup80%overthelast
year.Growth,thoughslowing,hasstabilisedrecently.Otherassetmarketsareperforming
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China'sstockmarketcrash:Aredflag|TheEconomist

well.Property,longinthedoldrums,isturningup.Money
marketratesarelowandsteady,suggestingcalminthe
bankingsector.Theanticipatedcorrectionofovervalued
stockshardlyseemscauseformuchanguish.
YetChinasinterventionhasscreamedofpanic.Hadthe
centralbankstoppedatcuttinginterestratesjustifiable
supportfortheeconomywheninflationissolowthatwould
havebeenreasonable.Instead,therehasbeenaspectacleof
evermoredrasticactionstosavethemarket.Regulators
cappedshortselling.Pensionfundspledgedtobuymorestocks.Thegovernment
suspendedinitialpublicofferings,limitingthesupplyofsharestodriveupthepricesof
thosealreadylisted.Brokerscreatedafundtobuyshares,backedbycentralbankcash.
Allthewhile,statemediaplayedcheerleader.Farfromsavingthemarketfromdrowning,
thesuccessionoflifebuoysonlypusheditfurtherunderwater.TheCSI300,anindexof
Chinasbiggestlistedcompanies,fellalmost10%overseventradingdaysaftertherate
cut.ChiNext,anindexofhighgrowthcompaniesthatisoftendescribedasChina's
Nasdaq,fellby25%.
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China'sstockmarketcrash:Aredflag|TheEconomist

Theorieshaveflourishedaboutwhythegovernmenthaswadedinsoheavily.The
apparentdesperationis,somebelieve,asignthatofficialsseealoomingeconomic
collapse,andaretryingtostaunchthewoundbeforesocialupheavalensues.Thatstoryis
intriguing,butitisnotthemostlikely.
Lostinallthedramaaboutthestockmarketisthatitstillplaysasurprisinglysmallrolein
China.ThefreefloatvalueofChinesemarketstheamountavailablefortradingisjust
aboutathirdofGDP,comparedwithmorethan100%indevelopedeconomies.Lessthan
15%ofhouseholdfinancialassetsareinvestedinthestockmarket:whichiswhysoaring
sharesdidlittletoboostconsumptionandcrashingpriceswilldolittletohurtit.Many
stockswereboughtondebt,andtheunwindingoftheseloanshelpsexplainwhythe
governmenthasbeenunabletostoptherout.Butthisfinancingisnotasystemicriskitis
justabout1.5%oftotalassetsinthebankingsystem.
Ifeconomicstabilityisnotinperil,whythenthepanic?The
mostcompellingexplanationispolitics.Thegovernmenthas
stakedmuchcredibilityandprestigeonthestockmarket.
Whenthegoingwasstillgood,theofficialpresswaschocka
blockwitharticlesabouthowtherallyreflectedtheeconomic
Chinesegrowthislosingaltitude.Willitbe
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China'sstockmarketcrash:Aredflag|TheEconomist

asoftorhardlanding?
reformsthatXiJinping,Chinastopleader,wassettopush.Li
Keqiang,thepremier,saidrepeatedlythathewantedequity
marketstoprovideabiggershareofcorporatefinancingcomments,frompunters'
perspective,notunlikewavingaredcapeinfrontofabull.Thesuddenendtotherallyis
thefirstmajordentinthepublicstandingoftheXiLiteam.Thebotchedattemptsto
stabilisethemarketonlymakethemlookweaker,givingsuccourtotheircritics.

Butthebiggestconcernaboutthepanickedpolicyresponseiswhatitsaysaboutthe
government'sagenda.TheeconomichopesinvestedinMessrsXiandListemmedfrom
theirpledgeinlate2013toletmarketforcesplayadecisiveroleinallocatingresources.
Theactionsofthepasttendayshavemadeabundantlyclearthatitisstilltheotherway
around:theChinesegovernmentwantsadecisiveroleinmarkets.
Thefailureofsharepricestodotheirbiddingis,inthatrespect,welcome.Itshowsthatthe
CommunistParty,powerfulthoughitmaybe,cannotindefinitelybendmarketstoitswill.
Chineseleadersshouldheedthatlessonandgetonwiththechallengesofliberalisingtheir
economy.ArelapsetowardsstatismwillnotjustsetChinaback.Italsowillnotwork.
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China'sstockmarketcrash:Aredflag|TheEconomist

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