By intervening so forcefully the government staked a measure of its credibility on stabilising the market, and has created further political pressure on itself.
China’s stock market has shed more than a third of its value – or in excess of $3 trillion – in less than a month since a mid-June high. Although steep, the drop has so far only returned the markets to the same level as March 2015. This raises questions about why the authorities’ have felt the need this week to use emergency measures to try to prop up the market, including the use of state money to directly buy shares and implementing a six-month ban on large investors selling their shares.
In our view, Beijing’s actions are most probably an attempt to steady share prices and prevent a slump turning into a crash. Such an outcome in the markets would almost certainly have a negative knock-on effect not only on the wider Chinese economy – but also on the political legitimacy of the Chinese Communist Party (CCP), which is primarily predicated on delivering economic prosperity.
A protracted decline in market value would further undermine already slowing economic growth and could disrupt economic reforms. It would probably restrict the leadership’s longer term plans for businesses to access more financing through equity capital and to allow market forces to exert greater influence over the economy relative to the state. For now, the current measures show the authorities remain comfortable with major state intervention to guarantee stability. With the government having publicly emphasised the solidity of the stock market, further decline could also open the CCP to a loss of confidence in its ability to deliver prosperity among 90m affected Chinese shareholders.
Through his twin ‘mass line’ and anti-corruption drives within the CCP, President Xi has invested considerable effort in attempting to safeguard political legitimacy in order to secure long-term Party rule, taking on powerful interests within the ruling party. In addition, the caution with which the Chinese leadership has proceeded with reforms – pairing change with strict controls – shows its wariness of economic, political or social instability on any scale. These priorities, at least in part, appear to explain its interventionist response to the stock market fall.
The state's efforts to right the markets have not yet succeeded, despite signs of a rebound on Thursday and Friday, and earlier this week the securities regulator described a mood of ‘panic’ among investors. At one point, up to 90% of all listed stocks on the Chinese stock market stopped trading, either due to voluntarily suspending trading or because they had reached the daily drop limit. By intervening so forcefully the government staked a measure of its credibility on stabilising the market, and has created further political pressure on itself.
With the current market drop in part driven by investors selling shares in order to meet debts accrued by borrowing to buy shares (known as margin trading), further market decline seems probable in the coming weeks despite gains in the second half of the week. Serious implications for social stability will probably follow only in the event of a sustained and severe decline in the market. The number and size of protests and strikes has increased in China in recent years, the CCP’s tight social and political controls – and its continued delivery of economic opportunities – have so far prevented the emergence of more cohesive protest movements.
Image: "Shanghai skyline at night, panoramic. China, East Asia-2" by Mstyslav Chernov - Self-photographed, https://mstyslav-chernov.com/. Licensed under CC BY-SA 3.0 via Wikimedia Commons