Why China’s Stock Market Bailout Might be a Smart Move

A pedestrian bridge in Shanghai with a real-time stock ticker. China has announced a series of measures to stabilize share prices. (CHINATOPIX, via Associated Press)

Outside of China, the consensus among economists is overwhelming: The country’s efforts to prop up its plunging stock markets are doomed, the financial equivalent of King Canute trying to halt the incoming tide. But this being China, the conventional wisdom may turn out to be wrong.

Faced with an unnerving sell-off in its major markets that at one point had wiped out nearly $3 trillion in value, China has announced a series of measures to stabilize stock prices, including the establishment of a 120 billion renminbi ($19.4 billion) fund for the country’s largest brokerage firms to buy stocks.

So far, it’s hard to tell whether the government’s intervention is having much impact. After modest gains on Monday on news of the government’s plans, Chinese shares resumed their decline, with losses on Wednesday spreading from more speculative issues (many of which have now halted trading) to investor favorites listed on United States exchanges, like the online retailer the Alibaba Group and the Internet search company Baidu. But Chinese stocks rebounded on Thursday.

“From a Western market perspective, what China is trying to do cuts against everything we know that will work,” said Tsuyoshi Jin Saito, a founder and managing director of the Observatory Group, an economic and political advisory firm based in Washington. “But they don’t see this the way we do. People in the Western democracies tolerate volatility. But the failure of equity markets in China could translate into social unrest, which is a horrifying prospect for the Chinese leadership.”

For all the recent talk of liberalizing Chinese markets and opening them to more foreign investment, they remain as much political institutions as financial ones. It was Chinese government-sanctioned talk about the high returns offered by stocks that helped stoke the rally that caused valuations to double in just four months earlier this year. Many Chinese investors are now looking to their president, Xi Jinping, to make good on that encouragement and the implicit guarantee that came with it.

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SOURCE: JAMES B. STEWART
The New York Times