“Let a hundred flowers bloom.” – Mao Zedong
Recently, a loud cry of “fire” echoed through a bustling theatre in Shanghai. The audience, likely already edgy—whether due to a suspense film or a horror flick—immediately panicked. In an instant, a chaotic surge toward the exits ensued, but disaster struck as they found themselves trapped.
In their frenzy, the crowd pressed against the inward-opening door, sealing their fate. Unable to escape, they faced a grim outcome, along with the theatre itself. Thankfully, this is merely a fictional scenario—it serves as a metaphor for the economic turmoil currently unfolding in China. While no lives were lost, significant financial casualties have occurred.
Anyone paying attention could predict this financial debacle from a distance, perhaps even from across the Pacific. Yet, the reality of it happening is still staggering.
Shanghai Stocks Going Up In Smoke
The Shanghai Composite Index has plummeted dramatically. On June 5, it stood at 5,023, but has since fallen below 3,500—a staggering decline of over 30 percent within a month.
Alongside this market crash, around $4 trillion in perceived wealth has vanished in just three weeks. The questions remain: Where did this money originate, and where has it disappeared to?
Some speculate that this $4 trillion has ascended to “market heaven.” However, considering it was essentially fictitious wealth generated by the People’s Bank of China, it seems more accurate to presume it’s been sent to “market hell,” along with the hopes of countless individuals.
The swift decrease in stock values has thrown businesses into disarray. As reported by Bloomberg, “About 45 percent of China’s listed companies are suspended,” prompting traders to unload what they can.
The situation is exacerbated by government intervention. Officials are attempting to counteract natural market forces that seek to correct the distortions caused by reckless monetary policies. To further complicate matters, they are restricting the buying and selling of stocks, as well as media coverage.
The Ghost of Mao Zedong
For example, short selling has been banned, and China’s social security fund is no longer permitted to sell stocks. Additionally, the media has been prohibited from using phrases like “equity disaster” or “rescue the market.” These counterproductive measures only seem to worsen the crisis.
“The index futures exchange CFFEX has capped the daily limit for one-way new positions to 1,200 lots for the mid/small-cap CSI500 index and raised margin requirements from 10 percent to 30 percent for non-hedging short positions,” notes Deutsche Bank AG analyst Yuliang Chang. These actions may delay some speculative shorts but add to selling pressure in the cash market. Institutions find themselves unable to properly hedge their positions.
This highlights a broad issue: rapid rule changes often lead to unintended consequences. An institutional investor seeking to safeguard its investment and withstand the turmoil is hindered from doing so. With trading halted on numerous stocks and many consistently hitting the 10 percent price cap, those unwilling to face losses are compelled to sell immediately. Ironically, policies intended to stabilize the market may be sending investors scurrying toward the exits.
When the initial restrictions on stock sales failed, the government escalated its efforts. On Thursday and Friday, stock prices in China briefly surged. However, this is hardly a cause for celebration unless one finds comfort in deception.
The Financial Times reported that funds from the People’s Bank of China are being directly used to purchase stocks, appearing to be a desperate measure to control market chaos. Confirmation of this move has come from the China Securities Regulatory Commission.
Mao Zedong, the late Chinese Communist revolutionary and founder of the People’s Republic of China, must be smiling in his grave, for his ghost has orchestrated a remarkable heist.
Sincerely,
MN Gordon
for Economic Prism
