China’s Market Is Crashing, And It’s Doing Everything Wrong

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Blake Neff Reporter
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The stock market of China is in a free fall, and critics both inside and outside the country are accusing its Communist government of doing virtually everything wrong in its efforts to contain the crisis, risking the creation of Great Depression-level crash.

The implosion began about a month ago, when the Shanghai Composite Index closed at a high of 5,166, more than twice its value from last October. That extreme bull market was enabled by regulatory changes, with the government reducing trading fees and taking other steps that made it easier for both individuals and companies to take on debt in order to buy up stocks. But now the bubble is popping even faster than it inflated, and Beijing has been powerless to stop it. Today, the Shanghai Composite is down to 3,507, a drop of 33 percent in less than a month.

The Chinese government has made a number of aggressive moves to try and halt the drop. It is investing hundreds billions of dollars from the state’s pension fund, and then forbidding fund managers to sell. It has blocked any new initial public offerings, banned short selling, and pressured financial firms to buy shares which they are pledging to hold until the market has risen at least 20 percent.

The country has also tried to stem the rapid sell-off by simply banning major shareholders and corporate executives from selling their stakes in certain companies for six months, an approach that Wells Fargo financial expert Brian Jacobson told Bloomberg would simply never happen “in the U.S. or in any other developed market.”

Most dramatically, China has allowed over 1,300 companies to halt trading in order to “self preserve,” in the words of Chinese state media. As of this writing, over 40 percent of China’s equity market has frozen up.

But rather than improving the situation, many experts say China is simply making things far, far worse. Hong Kong-based business experts (who can speak more freely than their mainland colleagues) have pointed out one glaring problem with China’s meddling: Their actions have made it impossible for investors to get any accurate handle on the value of Chinese assets.

“The market has failed,” Hong Kong business strategist Hao Hong told Bloomberg Wednesday. “It’s distorted because we keep changing the rules as we play the game.”

Another Hong Kong financial expert was even more critical of his government: “Government intervention is clearly doing more negative than good,” said money manager Tony Chu. “There’s really panic out there.”

Nils Pratley, a finance writer for Britain’s The Guardian, recently wrote a scathing piece warning that China’s strategy would be “laughed out of court” if attempted by a Western government. He is particularly critical of the government directing more money to a state finance company whose purpose is to make loans so investors can make bigger stock market bets than they otherwise would.

“That’s right, in today’s communist China, there are subsidies for stock market speculation,” says Pratley.

The biggest problem isn’t the immediate danger of huge losses, though, says Pratley. It’s the long-term harm created by China’s government blatantly trying to dictate the market, decreeing that “share prices must rise because the state … has issued an order.”

“Whatever the outcome in the next few weeks, a policy of state-directed share prices is unsustainable in the long run. If investors believe there is an official safety net to protect them from losses, the next bubble will be bigger and even harder to deflate safely.”

For now, though, it looks like the catastrophe may be arriving sooner rather than later. The bloodbath reached a new peak Wednesday, despite Beijing’s best efforts. The Shanghai Composite fell a terrifying 8.2 percent in just three minutes at opening, and recovered only slightly to close with a 5.9 percent drop. The CSI3000 index, a collection of the 3,000 largest companies on the Shanghai and Shenzhen exchanges, saw a gruesome 6.8 percent drop in one day. Some of the most dire forecasters have pointed out that the scale of the drop, and the desperate coping measures, correlate very closely to the 1929 Wall Street Crash that preceded the Great Depression.

Why is China so desperate to stem what could be a natural, necessary correction? Many point to the nature of China’s one-party state. Over 90 million people are invested in the stock market, and the government may fear that a severe downturn could create the mass discontent necessary to endanger the regime. In the past, Chinese officials have worried if growth falls below 8 percent a year, it could trigger political upheaval.

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