The Great Fall of China

It sounded like 1929 all over again. Early this month, there were stories on social media about investors hit by the slump in the Chinese stockmarket jumping out of skyscrapers, says Peter Evans in The Sunday Times. The rumours were false, but plausible. Thousands of amateur investors, many of whom had borrowed money to buy stocks, had been devastated by a 30% plunge in the Shanghai Composite index.

What rattled many of them, as well as foreign observers, was that the government seemed to have lost control, as Fidelity’s Tom Stevenson noted in The Sunday Telegraph. “Short of a decree that the stockmarket can rise but not fall”, it had tried “pretty much everything”.

After monetary loosening in the form of interest-rate cuts and trimming banks’ minimum cash reserves failed to have an impact, it banned short selling, shelved initial public offerings, bought shares, suspended trading in half the market and even, “ludicrously”, forbade the use of “sensitive” words in market reports.

But by the end of last week, the frenzied campaign to prop up stocks was starting to look more successful. Stocks bounced on Thursday and Friday, rising by almost 11%, their biggest two-day gain since the crisis. Meanwhile, suspended stocks began to return to the bourse.

So is the “Great Fall of China” over, asks Randall W. Forsyth in Barron’s. Reorient Capital’s SteveWang notes that short selling slumped by 75% from its peak. That shows that “despite the patchy, uncoordinated and highly criticised policies being rushed out by Chinese financial regulators, the risk-reward for going against the state is not worth the effort”, he says. The authorities also ensured that a record $13bn flowed into Chinese equity funds in the week to last Thursday, says Bank of America Merrill Lynch.

Whether the stock slide ends this week or continues, the government has lost credibility. It had supposedly embraced pro-market reforms, but when push came to shove, resorted to increasingly statist measures to bolster stocks. Still, this doesn’t change the big picture, as MoneyWeek contributor Rupert Foster points out.

As he explained in our cover story last month, the gradual increase in consumption as a share of GDP should make China a solid long-term investment. And thanks to the overdue market correction, investors can now gain access far more cheaply than they could in June.