The pros and cons of China's irrational exuberance
Creating a stock bubble to prevent a run on the yuan and deflate its credit bubble may result in China exacerbating the latter by stealth
Call it irrational exuberance with Chinese characteristics.
In August last year, a fascinating campaign unfolded in the state-run media, prodding citizens to pile into stocks.
In one week alone that month, Xinhua ran at least eight articles touting the wonders and patriotic virtue of owning equities. The People's Daily and television channels joined in what analysts agreed was a party-sponsored drive to bolster a sagging market.
The preceding few months had been a bloodbath. By the end of May, the Shanghai Composite Index had lost US$460 billion of market value in just three years.
Presumably, officials figured that igniting a stock rally would boost confidence as President Xi Jinping recalibrated the economy away from excessive investment and debt and towards a "new normal" of slower growth.
With foreign investors dubious, Beijing looked to households. The government augmented the public relations blitz with regulatory sweeteners, reduced fees for trading and opening accounts, and an orchestrated series of investor presentations by the biggest banks.