Wednesday September 20, 2017

CHINA STRIVES TO STABILIZE STOCK MARKET AFTER PLUNGE

July 9, 2015

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Photo credit: Global Times

The past few weeks have been a painful nightmare for millions of investors in China, as the country’s stock market has experienced a dramatic downfall. In just three weeks, the Shanghai Composite Index has dropped nearly 30 percent from its peak at 5,166 points on June 12 to 3,686 points on July 3. Over US$2.7 trillion in value, or the equivalent of Britain’s gross domestic product, has evaporated from the market since the plunge began. While the government expresses confidence in restoring market stability, economists worry that the stock turmoil could undercut the credibility of Chinese government.

This stock market disaster brought China’s year-long “stock frenzy” to an end. According to Bloomberg, there are more than 90 million individual investors in China’s equity market, more than the Chinese Communist Party’s 87.8 million members. When the plunge hammered China’s stock market’s “rookie-investors”, or those who have little knowledge of stock market, became the biggest losers of the game. A middle school teacher from Beijing said she and her husband invested nearly all of their savings when the market was on the rise. After the market crash, she lost almost half of the value in her account and is now planning to sell off her holdings as soon as the market rebounds enough for her to break even. The loss is even greater to those families who borrowed money in order to invest.

In the wake of the stock market crash, the Chinese government took immediate steps as to halt the seemingly uncontrollable decline and put the stock market back on the right track. The government announced two initial efforts: encouraging the purchase of shares of the country’s biggest companies and suspending all further initial public offerings in China’s two stock exchanges. On July 4, the government-controlled Securities Association of China (SAC) said that 21 big brokerage firms had agreed to set up a fund worth at least $19.4 billion, to buy shares in the largest, most stable companies, and to stop selling shares from their own portfolios. Meanwhile, the SAC decided to temporarily halt new initial public offerings “in a bid to preserve liquidity in an increasingly volatile market,” as told by people with knowledge to the matter.

The Chinese leadership expressed determination to re-stabilize the stock market. Zhou Xiaochuan, China’s central-bank governor, said the People’s Bank of China must “hold fast to the bottom line that no systemic or regional financial risks should occur.” After meeting with key officials from the Council of State and other banking agencies on July 4, Premier Li Keqiang said “positive signs have been increasing in the last two months and structural readjustment has been accelerated…China’s fiscal and monetary policies have been taking effect, while both development momentum and risk prevention capabilities have been strengthened.”

However, those initial efforts do not seems to be working, raising concerns over the Chinese government’s ability to control economic outcomes. According to CNN, the stock market plunge could “prove a formidable challenge to China’s top leadership” and send a message that the government doesn’t control economic outcomes as much as they claim. Hongyi Lai, a professor from University of Nottingham, said actions need to be taken to mitigate public anger, since “millions of small investors were upset over their losses and the slump would complicate the government’s economic management.” Harry Harding, a specialist in Chinese politics, said the market crash could result in three successive ripples: “the first would consist of investment losses for households, the second would lie in slower economic growth and the last would be a political backlash against Mr. Xi and his team.”

Outside the stock market, the price of iron ore and copper has dropped as a result of the fear over an economic downturn in China. In the long term, this could also hurt places like Australia, which supplies a lot of China’s raw materials.

However, U.S. officials believe the market slide in China will have limited influence on the U.S. economy. During a forum at a Washington-based think tank, Secretary of Treasury Jacob J. Lew said, “China’s markets are still pretty much separated from world markets…They’re obviously moving towards being more integrated, but right now they’re not so.”

For more information on this topic, please visit the following links:

South China Morning Post – “After the fall: what will China do next to revive its stock markets?

Bloomberg Business – “There Are Now More Stock Traders in China Than Communist Party Members

New York Times – “China’s Market Rout Is a Double Threat”; “China Moves to Stabilize Stock Markets; Initial Offerings Halted

Wall Street Journal – “China to Suspend New Stock Sales to Preserve Liquidity

Xinhua News – “Chinese cabinet expresses confidence in economy

CNN  – “Key things to know about China’s market meltdown

Los Angeles Times  – “What China’s bursting stock bubble means for the U.S. economy

For Chinese language news on this topic, see the sources below:

搜狐新闻  – “A股救市 两天都发生了什么

BBC 中文网  – “美国财长希望股市动荡不会放慢中国改革

新华网  – “国务院:有信心完成全年经济社会发展主要目标

Compiled and edited by Junxiao Liang.