I see that the editors of the Wall Street Journal have the same intuition that I expressed yesterday about the Chinese government’s intervention into that country’s ongoing stock market crash—that the intervention may be hurting more than it’s helping:
Beijing is learning the hard way that intervention can make a stock panic worse. In the past two weeks the Chinese government has rolled out measures to support share prices, even forcing state-run entities to buy. Yet the indexes have continued to fall, and each failure is making it more difficult for the market to find its natural bottom.
The Shanghai Composite Index fell a further 5.9% on Wednesday, 32% below its June 12 peak. Almost one-half of listed companies have suspended trading in their shares, and the Shanghai and Shenzhen markets are in danger of freezing due to too few buyers. On Wednesday the lack of confidence spread to Chinese bonds and the yuan as investors began to worry about the overall economy.
That’s some reckoning from even a few weeks ago. Many investors believed they couldn’t lose money in Chinese stocks because government officials cheered on the bull run. When the People’s Daily, the Party’s mouthpiece, encouraged citizens to buy stocks, many investors piled into the market because they know Beijing still controls the commanding heights of the economy.
Small investors are now questioning their faith in the Communist Party’s ability to manipulate the markets, which is the beginning of wisdom. More troubling is that the debacle has damaged the credibility of the government’s economic policy makers. It is a useful reminder that the Party’s authoritarian control is incompatible with free markets and continues to restrain China’s development.
Don’t be surprised when the Chinese devalue their currency again. Our balance of trade with China, already increasing, may push back into the record territory of a year or so ago. Increasing imports and decreasing exports will result in additional declines in U. S. GDP.
We may not be directly exposed to China’s stock market crash but the indirect effects, particularly China’s government’s attempts at managing the economic fallout, are coming around to get us from behind.
Update
This morning the Chinese stock market is recovering a bit of the ground it’s lost over the last several sessions. I think it would be premature to decide whether this is the market “testing the bottom” or just a “dead cat bounce”. My prejudice is towards the latter but that’s all it is.
Meanwhile, I heard something very interesting this morning. One analyst, speaking from Shanghai, noted that if the Chinese government had really wanted to intervene to stabilize the Chinese stock market, it would have intervened a year ago when the market was skyrocketing. What’s going on now appears to be intervention to help its friends (my interpretation).
