China recruits banks to prop up stock market

chinastock

In eye watering news, China’s biggest banks have lent 1.3 tn yuan  to stop the slide in Chinese shares. The money was lent to state-backed China Securities Finance (CSF), which then loans the money to investors for buying shares in a practice known as margin lending (ie they’re buying shares on debt).

This tells us how much the recent rebound in the country’s stock market was reliant on state intervention.

As Paul Krugman warns us, government attempts to stop stock market collapses are bound to fail.

“The general point is that if you believe that officials have the economy — any economy — under control, you’re setting yourself up for a big disappointment. And in particular, it’s invariably a very bad idea to assume that officials know things that outside economists don’t. When it comes to economic policy, everyone has pretty much the same information, and holding public office, whatever its other benefits, does not improve one’s analytical skills.”

But the Chinese government is doing it for a very good reason.

“I believe it’s more political risk. The top authorities are fretting that the sharp pullback could lead to social unrest,”  Zhang Yidong, chief strategist at  Industrial Securities told The Wall Street Journal.

Well-functioning equity markets are created by policies that strengthen the financial and economic architecture, not with those that meddle with prices. The Chinese government doesn’t have a clue.

The point is that by encouraging people to buy shares, by lending them money, the Chinese government is encouraging another market bubble even as the existing one deflates. And that will mean more stock market upheaval.

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