Stock Market Misadventures, Chinese-Style
Chinese officials have been doing some pretty interesting things over the past couple of weeks to stave off a stock price collapse. They’ve cracked down on short sellers, encouraged pension funds to put more money in stocks, suspended initial public offerings and dramatically eased borrowing requirements. Chinese speculators can now put up their houses as collateral to buy more shares, as my Bloomberg View colleague William Pesek pointed out earlier today. Meanwhile, Chinese brokerage firms have joined together, in an effort eerily reminiscent of attempts to stabilize the U.S. stock market in October 1929, to pump almost $20 billion into large-cap stocks. Oh, and the country’s central bank will reportedly provide financing to this stabilization fund.
All this activity has brought a lot of tsk-tsking from Western financial observers. “The equity market saga will hardly persuade foreigners that China’s markets are real markets,” veteran UBS Group economist George Magnus told Bloomberg News. That seems a little unfair, given that almost every step the Chinese government has taken is an imitation of something tried in the past in New York, London or elsewhere. The bigger problem seems to be that government attempts to force equity markets to behave so often fail, and seem to be failing so far in China.
Yes, the Shanghai Composite Index actually rose 2.4 percent today, with large-cap stocks leading the way. But smaller stocks kept losing ground, and Chinese shares trading on the Hong Kong Stock Exchange fell 3 percent. Overall the Shanghai index, which had risen 150 percent in the year leading up to June 12, is down 27 percent since then.
Of course, that still means stock prices are a lot higher than they were a year ago. So what’s the big deal?
The big deal seems to be mainly the behavior of the Chinese government. One clear lesson of the past 15 years in the U.S. is that a big asset price decline only has to be economic disaster if those assets were bought mostly with borrowed money. So, sure, the stock market collapse of 2000-2002 was painful, but nothing like the housing-price collapse of 2007-2009.
Yet Chinese officials have been encouraging people for months to buy stocks with borrowed money, and Chinese speculators have responded by borrowing an estimated 3.8 trillion yuan ($610 billion) for stock purchases. The idea was seemingly to steer speculative fervor away from the country’s overbuilt property market and into the stock market. Also, rising stock prices were seen as a way to keep animal spirits up in an economy that is clearly slowing down. But wow, what a risky, hard-to-control way to do that!
One benefit of China’s current stock market troubles, Peter Thal Larsen of Reuters Breakingviews tweeted this morning, will be “less gushing about the country's omnipotent, omniscient leaders.” Ineptitude is one possible explanation for the government’s stock market misadventures. I can think of an even scarier one, though. It’s that Chinese officials, while perhaps less than omnipotent and omniscient, actually do know what they’re doing and see their current path as the only possible way to avert an economic hard landing.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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