China has for long displayed signs of a classic stock market bubble. The dramatic collapse of equity prices this month suggests that the bubble could finally have popped. The rest of the world is finally taking notice. After all, the $10 trillion Chinese economy is around 40 times larger than the Greek one.
The Chinese version of the Greenspan Put has amounted to nothing more than a desperate attempt to fill air into a collapsing bubble; the interest rate cut last week was the fourth this year. And the rest of the policy response of the Chinese government to the market crash reveals a lingering central planning mindset, even though the Third Plenum of the Communist Party of China had famously resolved in 2013 the market process would play a decisive role in the economy.
The government has threatened short sellers, prevented large shareholders from selling, put new initial public offers on hold, ordered state agencies to buy shares to prop up the market, used a finance company owned by the government to lend $42 billion to brokers and backed a plan by a few top brokerages to buy $20 billion of shares. The Chinese market rallied on Thursday but such diktats can only work temporarily.
The recent market convulsions should be seen against the backdrop of what has happened in China over the past couple of decades. The greatest growth story in human history is now perhaps coming to an end.
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