Neither devaluation nor another stock market bubble can promote China's economic health

Has Beijing's stock market rescue been a success? The market hasn't fallen below the pre-bailout lows and some may call this a success. But it hasn't revived speculative fervour. Every attempt to ramp up the market has been punctured by a mini crash.

The 70 per cent reduction in trading volume indicates that most investors are waiting for the government to push up the market to the said target of 4,500 and then cash out. When so many think like this, the market will never get there.

The bailout is mostly a confidence game. There is no transparency about how much money the government has actually poured in. Some measures may make a little difference to the supply- demand balance. For example, stockbrokers have been banned from selling their inventories before the market hits 4,500. But is that a large amount? State-owned enterprises have been asked to buy back shares. Again, the tidbits on the buybacks indicate tiny amounts relative to the market size.

The most significant move has probably been the suspending of margin calls. As margin loans may have accounted for a third of the floating shares at the peak, a total ban could be a big deal. But it's unclear as to who still falls under the restrictions. Stockbrokers have been cutting their margin loans. For the numerous outside players who provide top-up margin loans, there is no transparency about who is still restricted. Chances are, most margin loan suppliers are selling. They are holding back in many cases because they are under water; they are waiting for the government to push the market above their cost to liquidate.

The government rescue efforts have manufactured hope for speculators and lenders that they could be made whole again. The hope game can't last forever. At some point, they will liquidate to cut their losses. When this tipping point is reached, no government efforts could stop the collapse. In 2008, when the market dropped by half, similar government efforts kept the market range-bound for several months. The final collapse cut the market index by another half. This time could be quite similar.

When the market began to surge in the middle of last year, the index was near 2,000 for a long time. After a 150 per cent surge in 12 months, the economic fundamentals deteriorated sharply, and the market was saddled with mountains of debt. This combination suggests the market will eventually fall below where it came from.

As the government stakes so much on propping up the stock market, it begs the question: why? The stock market has not raised that much money relative to the investment size. It has surged and collapsed many times before with no big impact on the economy either way. The difference this time is that a stock market boom was sold as the panacea to solve all economic ills: distressed companies could raise money to stay afloat; youths would be motivated to start businesses to cash out in the market; and retail investors would feel rich and spend more. The market collapse puts an end to such fantasy economics. And there is no plan B.