The Chinese stock market rose sharply within 6 months before it crashed in June 2015. The headline was: over 2 trillion Renminbi (over 300 billion US dollars) have evaporated. In reality, twice of that amount was created, much of which still remain in the stock market. In that sense, the crash was just a correction, albeit a nasty one -- one which could unsettle the society. For that reason, Beijing intervened. This boom and crash was a redistribution of wealth -- from the herd-investors to those in the know. The bull market was probably created to turn debt into equity. The issues are extremely complex, which go beyond the stock market.
After a long bull market, the Chinese stock market crashed in June, 2015. In less than a month, the Shanghai Composite Index fell nearly 30%, before the government stepped in to rescue the market. Newspaper headlines report that the Chinese market has lost, say, 2.2 trillion Renminbi, or US$355 billion.
People talked about wealth evaporation because it shocks. But few mention the wealth "creation", without which nothing was there to evaporate! In fact, the wealth created was much bigger! Before mid-2014, the Shanghai Composite Index was within the 2000 to 2500 points level. It rose to 3000 by the end of 2014, and then rose sharply to over 5200 points in June 2015. So a lot of wealth was "created".
In this context, the crash should really be seen as a correction. Even after the crash, the market was still up by 75% from a year ago! If the fall has wiped out 2.2 trillion Renminbi, then the bull market before the crash has created something like 4.3 trillion Renminbi, or US$700 billion!
Stock prices rose because investors were willing to buy it. In this case, money came from ordinary people in China Such money can come from two sources:
If the investors in June 2014 (when the Shanghai Composite Index was at 2000 points) were the same investors as the investors at the peak (over 5000 points) and now (between 3000 and 4000 points), then they are still making a profit.
However, that is not true. Many investors joined the band wagon when it was pretty high - when they saw that others have apparently made a fortune from the stock market. Those new investors may use high leverage. When the market crashed, they lost everything -- including the properties that they may have re-mortgaged to finance the investment.
Those who have lost money tend to be the new comers who are driven by opinions in the mass media (which could be manipulation). The relatively few who are well informed would probably have sold their stocks at high prices. So this crash boom and crash has probably redistributed wealth from the herd-driven investors to those in the know.
Unfortunately, this correction takes the form of a crash. Such a crash could disturb the public, which could affect the stability of the country. Therefore, the Chinese government felt that it had to intervene.
Yes and no.
Yes, the government can use announcements to influence the market. They can also go into big companies and order the shareholders to buy (back). They can "print money" and use them to buy shares.
No, because if the market crashes below 2000 points, then the size of the market is huge. If the government buys in with "printed money", they would have to print trillions in a short period of time. This will inevitably lead to hyper-inflation. So this is not really a solution.
The Chinese government seems to be attempting to determine the price level of the stock market. Is it possible to do so? Is it practical to do so? One problem is that the Chinese market is huge in volume and full of herding behaviour. The momentum that it carries is enormous. Most government actions involve some sort of delay. This makes control difficult.
More importantly, if the government were to plan the stock market, it has to find out the true value of a company or the "desirable" value (from the government's point of view) of a company. Any mispricing is subject to exploitation by traders, which could lead to instability of the market.
Why did the Chinese government create a bull market? Here is one plausible motivation:
Here is another theory for explaining why Beijing engineered a bull market: It helps to boosting the internal market. When stock prices go up, people feel that they have more wealth. Therefore they would spend more.
The internal market is very important to China, now that the export market does not have a lot of room to grow:
When China's GDP was US$100 billion, it needed to increase their GDP by US$10 billion to grow by 10%. They could achieve that by increased export. When China's GDP was US$1 trillion, it needed to increase their GDP by US$100. Now China's GDP is US$8 trillion, the second biggest economy in the world, a growth of 7% would mean an increase of GDP by US$560 billion. Export cannot possibly support their growth, because US$560 billion is a large percentage of the GDP for most of China's trade partners.
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