Why the US-China trade war complicates Beijing’s response to the market crash
- Government support for the stock market may need to continue for some time for it to avoid further drops in prices, because of the escalating US-China trade war
The Chinese government has been far less interventionist in its effort to bolster the stock market recently, when compared with steps taken to contain a market meltdown in 2015.
And because the situation is dominated by an external threat this time – the US-China trade war – Beijing may have to accept the outcome of slowing economic growth, which will continue to put downward pressure on domestic stocks, analysts have said. This means the market will remain volatile for some time, and the government’s support will need to remain in place for an extended period.
China’s stocks fall to 4-year low amid fears of forced selling
It is not yet clear if the steps taken by the government so far have been successful in preventing this year’s market slide from turning into a bigger systemic crisis throughout the Chinese financial system.
Supportive comments by top government officials and stock buying by several government-linked funds helped the Shanghai Composite Index rise by 2.6 per cent on Friday and another 4.1 per cent on Monday, but much of these gains were erased after a loss of 3.3 per cent in the following three days. And a rout in technology stocks on Wall Street on Wednesday, which wiped out all US market gains for the year, is making stock investors worldwide increasingly nervous.
But Beijing appears to have learned from mistakes made during the 2015 market crisis. It is avoiding heavy handed and ill-thought out intervention, which backfired, scuttling its ambitions of having its shares included in major international stock indices at the time.
The 2015 crisis
In the summer of 2015, the Chinese authorities took drastic action to halt a stock market rout and contain the outbreak of financial risks that threatened the entire financial system. A “national team” of state-controlled financial companies was formed to bail out the market. The team was led by China Securities Finance Corporation, which injected funds into brokerages, while sovereign wealth fund subsidiary Central Huijin Investment bought shares of blue chips as well as smaller companies. The stock regulator banned major shareholders from selling their shares. Short-sellers and journalists were detained and questioned as part of an official inquiry into market volatility.