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What the China stock market roller coaster means

Scott Tong Jul 6, 2015
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The roller coaster that is the Shanghai stock market bounced back up a bit today, after a 25 percent plunge over the last two weeks. The government suspended initial public offerings to cap the supply of stocks for investors. And it persuaded 21 brokerage firms to pledge to buy stocks.

“All the large brokerages are directly controlled by the Communist Party,” says Andy Rothman, Matthews Asia investment strategist. “So when the party says ‘We’d like you to take the following steps to try and put a floor under the market,’ the brokers say, ‘Yes sir.’ ”

Which suggests China’s market reflects Beijing helicopter-parenting much more than the actual economy. One is not the other.

“Over the last six years,” Rothman says, “China’s had the best-performing economy in the world and one of the weakest stock markets in the world.”

A market that might make investors nervous about contagion. But mainland stocks are like a hospital room with plastic curtains to contain germs.

“There’s certainly not enough foreigners that have investments in the equity market there,” says Tim Mulholland of the advisory firm China-American Capital. “It’s a closed-type market. A Chinese stock market selloff isn’t going to really mean anything in the global scheme.”

Still, one long-term concern is that the state will continue to manipulate the stock market up and down, which could have negative consequences for broader economic growth.

“Volatility in the financial markets creates uncertainty,” says Yukon Huang, former China country director for the World Bank, now of the Carnegie Endowment for International Peace. “Uncertainty has a very negative impact upon investment. And investment is essentially the longer-term determinant of how rapidly a country or economy like China can grow.”

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