The Chinese Economy
This Is Not a Market

You can’t fight the Fed and you can’t fight City Hall, and you especially can’t fight them when you live in a one-party state and the party wants stocks to go up, up, up! After a hairy week that saw Beijing freezing trading of most publicly traded companies amid a precipitous decline in Chinese stocks, state control over the markets seems to have turned things around. The FT has more:

Officials have sprung into action to prevent the stock market plunge from turning into a collapse. Before the rebound late last week, the two main share indices had dropped by a third since multiyear highs on June 12, wiping trillions of dollars off the value of listed companies.

Beijing’s efforts include a ban on stock sales by large shareholders and executives, and the extension of credit to brokers to help them buy shares and equity funds.

In the latest government intervention, the China Securities Regulatory Commission said on Sunday it was clamping down further on “grey market” margin finance, seen by many analysts as a big cause of the extreme volatility. […]

The China Daily reported on Monday that the CSRC was planning to alter securities laws to build a “financial stabilisation fund”, which the state-run newspaper said would “legitimise and enable government intervention during turmoil”.

In other words, positions in China stocks are now only secondarily bets on the quality of a particular company’s management or its market position. Above all, they are bets on what you think the Chinese Communist Party thinks the price of this stock should be.

Party insiders now have another excellent way to make money: Just patriotically invest (with generous financial support from state banks and credit facilities) in stocks when you know that the party leadership has determined that they need to go up.

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