Lessons of China's Crash

At WSJ, "Attempts to put a floor under prices are adding to the market panic":

Beijing is learning the hard way that intervention can make a stock panic worse. In the past two weeks the Chinese government has rolled out measures to support share prices, even forcing state-run entities to buy. Yet the indexes have continued to fall, and each failure is making it more difficult for the market to find its natural bottom.

The Shanghai Composite Index fell a further 5.9% on Wednesday, 32% below its June 12 peak. Almost one-half of listed companies have suspended trading in their shares, and the Shanghai and Shenzhen markets are in danger of freezing due to too few buyers. On Wednesday the lack of confidence spread to Chinese bonds and the yuan as investors began to worry about the overall economy.

That’s some reckoning from even a few weeks ago. Many investors believed they couldn’t lose money in Chinese stocks because government officials cheered on the bull run. When the People’s Daily, the Party’s mouthpiece, encouraged citizens to buy stocks, many investors piled into the market because they know Beijing still controls the commanding heights of the economy.

Small investors are now questioning their faith in the Communist Party’s ability to manipulate the markets, which is the beginning of wisdom. More troubling is that the debacle has damaged the credibility of the government’s economic policy makers. It is a useful reminder that the Party’s authoritarian control is incompatible with free markets and continues to restrain China’s development.

The irony is that the Politburo under Xi Jinping pursued a new strategy to boost the stock market last year as a way to increase the role of market forces. State-owned enterprises were supposed to become more responsive and consolidate industries with overcapacity. Small entrepreneurs would be able to offer shares to the public, a privilege that was previously restricted.

The strategy started out well enough. By the end of last year, the initial rally had provided some momentum for reforms. And with stock prices depressed since the collapse of the last stock-buying mania in 2007, they were arguably still good value.

But Chinese officials confused a rising market with a healthy one. Promotion of the market’s role quickly became promotion of an ever-rising market. This reflects a Communist Party culture that tries to tightly manage outcomes because they reflect on those who push the policy.

This is the underlying reason that irrational exuberance took hold this year. The bull market sucked in tens of thousands of small investors who had never bought stocks. Margin lending expanded five-fold to $323 billion last month. Having mounted a tiger, government officials found they had no safe way to get off as it ran faster and faster.

So far the Xi administration remains in a state of denial and officials are doubling down on failed policies that are compounding the political and economic damage...

Still more.

Plus, "China Stock Gains Gather Pace."

BONUS: At Instapundit, "DANIEL DREZNER ON CHINA’S STOCK MARKET COLLAPSE."