June was an unusually cruel month for the Chinese stock markets—and yet, somehow, July outdid it.
The Shanghai Composite benchmark index ended the month down 14.3%. That compares with June’s 7.3% loss. (To be fair, though, Chinese stocks peaked in mid-June, shedding 17.2% after June 12.)
It was only in the last week or so that things got truly ugly. Until then, the Chinese government’s heavy-handed intervention, which began July 4, kept the market mostly calm for nearly two weeks.
And then came the blowback. As long as investors felt confident that the “Xi Jinping put” meant the government would keep shoveling money into stocks, they bought, too. But when rumors that the authorities were pulling out kicked up late last week, investors bailed en masse.
This has created a weird and self-defeating dynamic, as Chang Liu and Mark Williams of Capital Economics point out. “The market is driven more than ever by speculation about official intentions,” they write in a note today, “and any positive momentum will raise questions about whether support will be withdrawn.”
In fact, by pledging to support the market until the Shanghai Composite hits 4,500, the government has made this explicit. With the benchmark index now at 3,664, the government has a Sisyphean slog to hit its target.
The problem now is that every time the benchmark index starts nearing 4,500—it hit 4,124 on July 23—investors will pack up their things and go home. This effort to time the government’s withdrawal of support likely contributed to the dramatic July 27 selloff that shaved 8.5% off the Shanghai Composite, says Lei Mao, assistant finance professor at Warwick Business School at the University of Warwick in the UK. On top of that, Shanghai stocks still don’t look cheap enough to encourage investors to stomach short-term volatility, Capital Economics’ analysts argue.
In short, the Chinese government’s “mechanical bull” campaign—i.e. a year-long effort to create a bull market plus a rescue plan for when things went south—has left it in quite a pickle.
Letting the market crash a month ago probably would not have been a huge deal; fewer than a tenth of households own stocks, so popular outrage would have been unlikely. But the government’s intervention has now put both its credibility and trillions of dollars in government resources on the line.