After watching mounting equity losses, Chinese policymakers today unveiled new measures designed to stem the downturn in stock valuations. With the Shanghai Composite erasing over -15% of its market capitalization in the last two sessions since the weekly reopening, the question of central bank integrity and invincibility remains a serious concern. After multiple failed interventions aimed at directly propping up slumping equity markets, policymakers have come to realization that cushioning the fall is draining available resources to face an actual crisis instead of a debt margin fueled trading bubble. This rebalancing and correction comes at a time when anxiety about the world’s foremost export economy is reaching a fever pitch amid speculation that growth is substantially below officially recognized levels. Moreover, the takeaway from this latest crisis highlights the interwoven nature of the global economy and suggests that one of the shortcomings of greater integration is the global impact of policy adjustments.
The crisis shows the depth and seriousness of the headwinds facing centrally planned economies as a stock market that embodies some free market principles operates under a centrally planned paradigm. Chinese policymakers are discovering the very limits of central planning as they try and instill renewed confidence amongst investors at a time when it continues to wane. Today’s policy adjustments reflect the growing unease as the People’s Bank of China works anxiously to ease liquidity conditions on the mainland and prevent sustained capital outflows which are also draining resources away from the economy. So far the reserve ratio and interest rate cuts have been met with a positive response as energy and base metals rebound while safe haven assets retreat modestly. However, the gains from such actions are likely to be short-term in nature as the problems fail to address the bigger issue at the core of the problem which remains margin debt fueled trading. Until margin debt is adequately unwound, China will continue to be the epicenter of financial market volatility.