Memo to China: Your Market Moves Are Doomed to Fail

From a Chinese market
From a Chinese market

When an economy is built upon dishonesty, and dishonest prices most importantly, an economy’s reckoning is only a matter of time. The further the charade goes on, the worse the reckoning. China’s been going on for a long time.

Now the Chinese government is trying to save its market with more central planning and knob turning. And don’t forget about the guns it has too.

But ultimately the system will erode. It isn’t built on real prices.

Many people in China don’t even really know what honest pricing is. Including in high level policy circles.

(From The Wall Street Journal)

There’s something poignantly human about every attempt to make markets behave as we all wish they would: always rising and making us richer, never falling and inflicting pain upon us.

Governments have been trying—and failing—to control markets for centuries. If the Chinese government succeeds, it will be the exception to that rule. If it fails, the results could be dire.

The Chinese authorities made a rising stock market such a priority that they encouraged local investors to buy stocks on margin, or with borrowed money, until total margin loans exceeded $320 billion. That was nearly 9% of the total value of Chinese stocks—and 10% greater than the gross domestic product of Hong Kong.

“Not only were Chinese investors not familiar with the downside risks of [trading on margin], neither were the regulators and policy makers,” says Zhiwu Chen, a finance professor at the Yale School of Management who studies the Chinese capital markets. “As a result of this recent experience, I do think China will go through much rethinking and slow down its efforts to open up its financial markets.”

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