21 September 2019
If the economy is improving, is there any need for Beijing to roll out a raft of rescue measures for the stock market, ask critics. Photo: Reuters
If the economy is improving, is there any need for Beijing to roll out a raft of rescue measures for the stock market, ask critics. Photo: Reuters

Will Beijing’s market rescue maneuvers work?

The Shanghai Composite Index has nosedived more than 20 percent within the past fortnight and 18 trillion yuan (US$2.9 trillion) of market value – equaling a fourth of China’s 2014 gross domestic product – has evaporated.

Judging from a previous market meltdown in 2007, it is possible that the index could slide even further.

Now, this has Beijing very worried, prompting authorities to take emergency measures.

Last week the State Council unveiled several steps for market rescue after a meeting attended by heads of the People’s Bank of China, China Banking Regulatory Commission, Securities Regulatory Commission, Insurance Regulatory Commission, Ministry of Finance, State-owned Assets Supervision and Administration Commission as well as key state-owned enterprises.

The raft of the measures is truly humongous, if not frightening:

1) The first batch of 28 firms listed on the second-board market since 2009 have been mandated to pledge their confidence in the Chinese economy, not only in lip service but also through “concrete moves” like buying back stock and increasing their ownership.

2) The Securities Regulatory Commission has halted all initial public offerings to avoid further slumps that may be triggered by supply of new shares in an already desolate market. In its notice, the securities watchdog said the decision was made in light of the “recent market fluctuations” – a fancy understatement of the sharp tumble.

3) Up to 13.5 billion yuan of taxpayers’ money has been used by Central Huijin Investment Co., a subsidiary of the nation’s sovereign wealth fund China Investment Corp., for purchases of shares of the four largest exchange-traded funds since the end of June. The amount equaled to a third of last week’s net increment in ETF turnover.

4) Twenty-one large brokers have been requested to channel 120 billion yuan (15 percent of their combined asset value as at the end of last month) for a market stabilization fund.

In the past thirty days Beijing has been busy churning out measures.

There’s no denying that all governments will pump in liquidity and boost morale whenever there is a crisis of this magnitude, but what Beijing has been doing is full of the “Chinese characteristics”: when the real economy is cooling down, it begins to manipulate the capital market to create fake euphoria in which asset prices keep smashing new records.

But when the bull run is no longer sustainable, it coerces private firms and brokers into footing the bill.

As for the de facto stabilization fund mentioned above, Chinese ancient rulers knew well the adverse impact of government interference through such means.

Historical records show that in Western Han dynasty more than two millenniums ago, the government monopolized supply of salt, ironware and liquor in the name of stabilizing the market. This led to rampant corruption and price manipulation.

Now, coming back to the current situation, the 21 brokers who have been ordered by authorities to join a stabilization fund can easily band together to profit from “market stabilizing” trades. The only thing they need may be a little coordination from those high up in the government. 

This article appeared in the Hong Kong Economic Journal on July 6.

Translation by Frank Chen

[Chinese version 中文版]

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Former full-time member of the Hong Kong Government’s Central Policy Unit, former editor-in-chief of the Hong Kong Economic Journal