Beijing Versus the Stock Market
China's government says it wants to increase the role of market forces in the economy. In the past few weeks, it's been frantically doing the opposite -- responding to a collapse in stock prices with a battery of measures to halt the slide.
The interventions brought a moment's respite at the start of this week. The Shanghai Composite Index, having fallen nearly 30 percent from its peak on June 12, gained 2.4 percent on July 6. Yet the sheer breadth of the authorities' response underlines the contradiction in Chinese policy. Stock markets rise and fall: Why have a market at all, if you're only willing to let prices go up?
The first response to the market tumble was a loosening of monetary policy, but the interventions didn't stop there. The State Council ordered a suspension of new share issues. Regulators proposed to let the national pension fund buy stocks. A government investment fund said it would buy index-tracking exchange-traded funds. Controls on margin lending were relaxed. Leading brokerage and fund-management companies said they'd support the market.
This orchestrated rush to arrest the fall in share prices has investors talking about a "Xi Jinping put" -- in homage to China's president and the notorious "Greenspan put" that was supposedly meant to put a floor under U.S. stock prices after the crash of 1987. (A week ago analysts were talking about a "Zhou put," named for Zhou Xiaochuan, governor of the People's Bank of China. The effort has broadened since then.)
The desire to arrest a market rout is understandable. And it's important to note that China's government is by no means alone in this. Market manipulation, broadly defined, is almost standard operating procedure -- including in the U.S. and Europe. Quantitative easing is explicitly intended to support financial-asset prices and hence demand. Short of that, financial authorities everywhere resort to market-calming measures from time to time.
Moreover, China's leaders have especially strong reasons for keeping the fall in prices from getting out of hand. China's economy is slowing, by design, but a stock-market collapse could make the slowdown too abrupt. The government also wants to encourage equity financing and to maintain the value of state assets that it might subsequently privatize. Not least, officials have been talking up the market for months and encouraging small investors to take a bet on China's future. The government's credibility is therefore on the line.
The reasoning is clear, but so is the risk. Markets that are only allowed to go up keep going up -- until they crash with greater violence. Trying too hard to put a floor under the market is not, in the end, a formula for stability. The danger, too, is that more and heavier interventions will be needed to delay the inevitable. Not only is the policy doomed to fail eventually, in the meantime it leans ever harder against the greater role for market forces that China's government rightly wants to promote.
Managing China's economic transition is hard, to be sure. But the best course for China's leaders is to detach themselves as much as possible from the stock market -- neither talking it up nor racing to stabilize it when it falls. That would give them more time to make the rest of financial system strong and flexible enough to take market fluctuations in stride.
--Editors: Clive Crook, Mary Duenwald
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