Why China's Stock Markets Matter
Editor's Note: China's stock markets on July 8 continued the precipitous three-week slide that began on June 12. In light of the markets' inherent volatility, Stratfor published this analysis on July 6 and is making it available to non-subscribers now.
The Shanghai Composite Index fell 6 percent on July 3, rounding out a 28 percent decline since June 12, when the country's stock markets peaked. The deterioration occurred despite intensive government efforts to stabilize prices and revive investor sentiment. Overt attempts by Beijing included cutting benchmark interest rates and reserve requirement ratios and loosening restrictions on investor access to margin loans, in addition to less overt moves, such as direct interventions to prop up the market with government-backed purchases of blue chip stocks. On Friday, in a clear bid to win investor confidence in its oversight abilities, the securities regulator announced it would investigate signs of potential market manipulation. Yet so far, Beijing's efforts have failed to achieve the desired effect of stimulating, or at least stabilizing, China's leading stock markets.
 | |
 |  |
 |  |
In the days and weeks ahead, Beijing will not meekly accept the natural winding down of the past year's stock boom turned bubble. Rather, it will continue to work, both overtly and covertly, to prevent prices from collapsing outright — all while seeking to reshape investor sentiment and expectations through investigations, like those recently announced. The question of why Beijing feels compelled to take action remains, especially when any intervention risks exacerbating whatever financial and political fallout may come from an eventual market decline or crash. The answer to this question lies in understanding the role of stock markets in China's economy and Beijing's broader policy priorities, as well as evaluating the potential effects of a stock market crash on both.
See also this video:
Conversation: The Political Consequences of China's Stock Market Collapse
Nurturing Consumer Growth
The Chinese government's core policy goal — the crux of its entire economic reform and rebalancing program — is to cultivate a domestic consumer base capable of supporting nationwide growth that is stable, sustainable and less exposed to fluctuations in external demand. To do this requires...
Read more »
