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China's Bubble
Xi to Sinking Shares: Arise, Ye Wretched of the Earth

It turns out the right time to buy stocks is when the Communist Party tells you to buy them. That’s the message coming out of China this weekend, where the world’s largest Marxist-Leninist political organization is issuing instructions to share traders: buy, buy, buy.

In quick response, 21 stock brokers have announced plans to buy $19.2 billion worth of shares. China’s sovereign wealth fund is also getting in on the act, and the Central Bank has announced measures to prop up the swooning stock market (the major Chinese indices fell by nearly a third in the past three weeks).

But Beijing’s power to induce a market rally by brute force appears to be limited. The WSJ reports:

The Shanghai Composite Index opened 7.8% higher Monday, making it look as if the all-out government mobilization would decisively lift stocks. But the index quickly pared those gains, spending part of the day in negative territory. It ended only 2.4% higher. Investors and analysts said heavy buying of blue-chip stocks like state-owned banks and energy firms late in the session appeared to be the work of state-backed funds. The smaller Shenzhen Composite fell 2.7%. […]

Moreover, stocks in Hong Kong are down 3.2 percent today, in what the WSJ notes is Hang Seng Index’ s “worst one-day performance since 2012.” All together, it seems like investors are responding to the specific measures government is putting into play, but remain wary about overall economic prospects. China’s equity markets, which had soared to unbelievable heights in the past year, may simply be due for a correction, whether Communist Party officials like it or not.

It is too early to tell whether the latest stock market turmoil is a sign of a larger slump with the power to end China’s extraordinary, decades-long economic boom. But it’s getting harder for the country’s economic technocrats to manage its markets, and it looks like President Xi Jinping won’t simply be able to will the challenges away.

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  • f1b0nacc1

    Perhaps sending Xi that collection of the wit and wisdom of Canute wasn’t the best idea…

  • Fat_Man

    Stock markets do not cause recessions. They reflect economic conditions, but most imperfectly. Examples abound. There was a violent US stock market crash in 1987, but no recession until 3 years later. The most recent recession began in December 2007. It was preceeded by an all time until then S&P 500 high in September of that year. The index did not begin to crash until March of 2008.

    • ImperiumVita

      Reports have it that the Chinese individual and corporate investors have been buying the stock market with borrowed money in hopes of easy gains to support repaying money owed on past debts. In this situation, a stock market crash would seems likely to cause a wider recession.

      • Fat_Man

        The Chinese did not invent margin lending. That factor has been present in all US stock bubbles and crashes.

        • f1b0nacc1

          In fairness, margin lending has been part of just about EVERY bubble/crash going back centuries. Who knows, the Chinese may in fact have invented it!

        • ImperiumVita

          I never said they invented it, so go ahead and pat yourself on the back.

  • fastrackn1

    Sounds like a buy at the top and sell at the bottom strategy, for those who follow.
    Reminds me of when the big brokerage houses were pounding the tables telling everyone to buy buy buy Nasdaq stocks right up until march 11 of 2000, and again to buy stocks right up until march 17 of 2008. Many listened and lost most or all of their savings.

    The best time to sell is when everyone who is anyone is saying buy buy buy….

    • ImperiumVita

      You would only lose your savings in a stock market crash if you are idiotic enough to sell at the low. Hold existing positions through a crash and buy what you can at the low point.

  • FriendlyGoat

    I have no idea whether China’s “sovereign wealth fund” can actually buy a significant chunk of its stock market to stabilize share prices.
    That’s a fund we don’t have here and a trick we don’t try here.

    • ImperiumVita

      Maybe its just me but it seems like a good way to lose a lot of money.

      • FriendlyGoat

        Very possibly. We don’t have a public entity directly buying equities here and it’s hard to know what might happen there. But “buy high” is always fraught with some risk.

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