“This has been quite a summer in China,” says Rob Schmitz, Marketplace’s China correspondent. “The thing that stands out to me is that Beijing decided to leave the market alone today, and look what happened. The biggest one-day drop in eight years on the Shanghai Composite – prompting markets everywhere else to spiral out of control.”
There had been some talk that China was going to take action over the weekend and everyone was waiting for it, but it didn’t happen. People wondered if they had given up, or if it was some kind of new strategy.
“I think it’s becoming increasingly clear that this whole ‘we are going to open our markets’ thing wasn’t that well thought out from the beginning,” Schmitz says. “China’s economists should have foreseen the margin lending, the short selling, the market shenanigans that happen everywhere else, and they should have been prepared for it.”
With things going downhill at the beginning of the summer, the state immediately intervened.
“Each time they stepped in, investors became less confident that China’s leaders knew what they were doing,” Schmitz says.
The Chinese government has tried to flood its banking system with cash by freeing up more funds for lending. China’s government also announced over the weekend that it would allow $100 billion worth of pension funds to be invested into the stock market.
“Would you want your pension fund in a free-falling market right now?” asks Schmitz. “I think the essence of the problem here is that China’s government says it wants to reform its financial system, it says it wants a more open market, but it really doesn’t want to commit to doing the very painful things that it needs to do in order to make this happen.”