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Recovery?
China: Not Out Of The Woods Yet?

China’s Shanghai Composite Index has recovered more than 15 percent since it hit bottom a week ago, after Beijing limited trading and started propping up the market. But the depths of intervention are only now becoming apparent, according to the FT

China’s biggest state-owned banks have lent a combined Rmb1.3tn ($209bn) to the country’s margin finance agency in recent weeks to staunch a freefall in the stock market, casting doubt on whether the recent equities rebound is sustainable without government support.

China Securities Finance Corp was established in 2011 to lend to securities brokerages to support their margin lending to stock investors. Amid the tumble in equities beginning in late June, however, the government has deployed CSF as a conduit for injecting rescue funds into the stock market.

CSF has lent to brokerages to finance their investment in shares and has also purchased mutual funds directly. But the latest revelations indicate that state support for the stock market is much larger than previously disclosed.

This kind of intervention will reassure stock market investors and speculators that the government has their backs in the short term, but the combination of emergency measures (like forbidding major shareholders from selling stocks at all) and vast inflows of cash to support the market only demonstrates that despite government vows, China is moving toward more state guidance rather than less. Wholesale government intervention in financial markets on this scale creates massive opportunities for corruption, distorts the allocation of capital, and makes the task of real economic reform much more difficult.

That China’s financial authorities have chosen a set of policies that carry such heavy costs just shows how frightened they were at the spectacle of an overheated stock market facing Armageddon. The biggest takeaway here is the people who understand China’s economy the best are terrified by the prospect of an implosion.

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  • Kevin

    They could go through a LOT of money trying to prop up these exchanges.

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