Regaining the Initiative
September 15, 2015
The bottom fell out of the Chinese stock market and policy experts wonder if Beijing is willing to learn its lesson. Supporters of Xi Jinping touted his highly-centralized economic policy as an attempt to reform a system desperate for efficiency and discipline. However, recent events reveal an authoritarian leader attempting to control the entire policy agenda.
Analysis of China's stock market crash has been difficult given the highly sanitized media environment. In fact, the most widely accepted version of the story does not appear in the official Chinese press at all. But outsiders have begun to piece together the facts.
- Following a meteoric rise, peaking on June 12 (5166 Shanghai Index), the stock market teetered before crashing to 3507 in less than a month.
- On July 4, Premier Li Keqiang and State Council met with key financial commissions and state-owned enterprises in order to coordinate a massive intervention.
- Markets stabilized on July 6 but plunged again on July 7 and 8, striking panic in many who believed the government's plan had worked. Further intervention brought relative stability on July 13.
- A quietly expressed sentiment among investors suggests they acted on the belief that Xi Jinping wanted a stock market boom in order to realize his "China Dream."
It is too soon to declare the crisis over. The extra-legal steps taken by the State have only increased anxiety among investors. Stock market regulation was mishandled, both on the way up and the way down, particularly with respect to provisions that allowed, then disallowed, then allowed again, margin trading.
Chinese stock market events over the past few months have seriously damaged the credibility of Chinese policymakers and of the reform process. We should anticipate that they will also move positively, and perhaps even preemptively, to reestablish the Chinese reform agenda.
Source: Barry Naughton, "Reform Agenda in Turmoil: Can Policymakers Regain the Initiative?" Hoover Institute, September 9, 2015.
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