[1]Image from Twitter user @StockCats on Chinese government's intervention of the stock market.
China’s steep market drop in early July zapped US $3 trillion worth of yuan [2] from investors’ pockets. More than half of the listed companies temporarily suspended trading and the Chinese government rolled out several measures [3] to try to right the ship.
Pretty soon after the fallout, rumors began to circulate that blamed hostile foreign forces of “malicious” short-selling [4]. Yet, in a market which consists of 99% domestic investors, even state-controlled media had to clarify [5] that the conspiracy theory could not explain the plunge. Though the Ministry of Public Security said [6] it would help the China Securities Regulatory Commission investigate evidence of “malicious” short selling of stocks and indexes, thus far no official report has been released.
But the conspiracy theory of foreign manipulation reemerged with an accusation made by Lin Zuoming, chairman of a state-owned aerospace and defense company called China Aviation Industry Corp.
Lin's statements appeared as a headline news [7] on Weibo, China's most popular social media platform on July 19:
中航工业董事长林左鸣：6月18日香港政改方案搁浅当天A股进入暴跌通道，6月29日亚投行签字当天A股仍遭暴力砸盘。时间上的惊人巧合并非偶然，而是有预谋的恶意做空。目的是诱导人民对政府不信任，最终破坏改革，直至击溃整个经济。在A股打响这场经济战争，是冲着五星红旗来的。
Lin Zuoming, chairman of China Aviation Industry Corp., said in an interview with a state newspaper that China’s stock market crash resulted from deliberately malicious short-selling aimed at breaking people’s faith in government, ultimately damaging China’s reform and crashing the economy. “It’s an economic war to change the five-star red national flag.
He further elaborated his point in a July 21 [8] opinion piece on Huanqui.com, a nationalistic news portal:
这一次的矛头明确针对中国了，直接挑战中国共产党的执政地位，考验我党驾驭经济的能力。做空势力想通过一连串事情导致经济滑坡，社会不稳定，甚至可能借机策动颜色革命。如今这个世界，经济、政治和军事是难以分割的，是一场立体战争。
This short-selling directly challenged the ruling position of the Communist Party of China, testing the party’s ability to manage the economy. The short-selling powers tried to use the plunge to make China’s economy slump and its society to become unstable, even to mobilize a Color Revolution.
His remark, despite not being grounded in reality, has gained much support online, but many finance and economic experts criticized the nationalistic conspiracy theory. Liu Shengjun, a well-known economist, mocked [9] the executive for his opinion on Weibo:
微臣以为，像林“左鸣”同志这样政治觉悟高、对敌人动向嗅觉极佳、口才好、既有股市谋略又有操作经验的同志，担任一家公司董事长太屈才了。我承认辩论不过他…臣力荐他担任《环球时报》总编辑
Your majesty, your humble servant's view is that comrades like Lin “Zuoming” [Lin's name literary means “voice from the left”] are very sensitive to political fights and spotting the enemies. With his excellent talent for debate and knowledge of stock investment strategies, it is a waste for him to be the chairman of a company. I admit that I could not win against him in a debate… your humble servant wants to nominate him as the editor-in-chief of Global Times [China’s nationalist newspaper]…
Shifting the blame
Since late June, the Chinese government has introduced a series of measures to pump up the stock market:
- The central bank cut interest rates and then injected liquidity to support the market in June.
- China Securities Finance Corp., set up in 2011 to support margin financing by securities companies, set aside 260 billion yuan ($41.8 billion) to lend to brokerages to finance stock purchases.
- Authorities restricted initial public offerings, called on company founders not to sell shares and launched an investigation into alleged “malicious” short selling.
- Authorities also allowed a suspension of trading in more than 1,400 stocks while the insurance regulator let insurers use more of their premium income to buy shares. Meanwhile, new hurdles to short-selling of index futures were put in place.
Regardless of whether the conspiracy theory holds or not, it is true that the finance system has become a significant part of Chinese national security, as reflected in its newly passed National Security Law [10]. It is not surprising to see government mouthpiece People's Daily maintain [11] that the official support was necessary to prevent a stock market disaster and argue that regulators in other countries have used similarly measures to head off potential market meltdowns.
The newspaper commentary did not address why regulators stood by and watched as credit poured into the stock market, fueling a prolonged advance that ultimately came undone. The newspaper also didn’t explain why it cheered the bull market before the fall.
The market collapsed essentially because stocks were overvalued [12] and margin trading [13] was excessive. Regulators moved too slowly to bring unsupervised margin trading under control. Investors got burned for believing the government could stop share prices from falling, and they were proved wrong; the predictable plunge damaged middle-class assets [14].
For months, the government urged households to invest in the stock market to generate more capital for state-run companies being weaned off bank loans, and editorials in China’s state-run news media celebrated the rising indexes. Market adulation reached its peak in April, when a commentary of People’s Daily told readers the 4,000 point mark reached by the Shanghai Stock Exchange was “only the start of the bull market.” [15]
If anyone has to be made accountable, it's the central government, state media and regulators, not “hostile foreign forces.”