SHANGHAI: China’s Communist government has averted a stock market crash—for now—but it will take the world’s second-largest economy longer to repair tarnished reform credentials and investment sentiment battered by its heavy-handed intervention.
After whipping and driving the Shanghai bourse up 150 percent in a year through looser monetary policy, glowing state media comment and margin trading—the use of borrowed funds on the exchange—the government was forced to intervene when sentiment turned and the market plunged 30 percent in just three weeks.
A rescue package using the full power of the state included the extraordinary steps of banning stockholders with more than 5 percent of a listed firm from selling shares, and a police crackdown on short selling—a bet prices will fall.
“The equity market’s gyrations have raised questions about the future direction of the economy and policy,” US investment bank Goldman Sachs said in a research report.
“Fissures in the equity market structure and regulations have been revealed, and damage to investor confidence has been severe and will take time to heal.”
Beijing also shut off initial public offerings (IPOs) at the flick of a switch and threatened what one analyst called the “nuclear” option by hinting the government could simply wade into the market and directly buy stock.
The moves were decidedly interventionist for an administration which two years ago pledged to allow the market to play a greater role in the economy, but analysts said economic and social stability outweighed such considerations.
“There is little hesitation in using administrative measures when they are viewed as necessary,” Goldman Sachs said of Beijing’s approach. “This balance reflects the government’s desire to avoid a hard landing or a crash.”
Stock volatility means a setback for China’s economic reforms—which proceed gradually, rather than a “big bang” approach.
“It is a fact that the market reform process will be delayed,” Chen Xingyu, a Shanghai-based analyst for Hong Kong’s Phillip Securities, told Agence France-Presse. “The market transformation sometimes relapses and retreats.”