The whole “market economy” thing is turning out to be a little trickier than China’s dictators expected. To set up the story: After the 2008 crash the country borrowed about $15 trillion (an amount that dwarfs the US Fed’s quantitative easing programs) and spent the proceeds on history’s biggest infrastructure program.
This pushed up the prices of iron ore, oil, copper, etc., igniting a global commodities boom. Then China liberalized its stock trading rules, setting off a stampede into local equities that doubled prices in less than a year. The result is a classically unbalanced economy, with massive physical malinvestment, overpriced financial assets and way too much debt. The inevitable crash began in June.
Beijing responded by tossing about 10% of GDP into equities to stop the bleeding. This worked, as such interventions tend to do, for a while. But last night it failed:
Chinese shares tumble 8.5 percent in biggest one-day drop since 2007
(Reuters) – Chinese shares slid more than 8 percent on Monday as an unprecedented government rescue plan to prop up valuations ran out of steam, throwing Beijing’s efforts to stave off a deeper crash into doubt.
Major indexes suffered their largest one-day drop since 2007, shattering three weeks of relative calm in China’s volatile stock markets since Beijing unleashed a barrage of support measures to arrest a slump that started in mid-June.
“The lesson from China’s last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect,” wrote Capital Economics analysts in a research note reacting to the slide.
The CSI300 index. CSI300 of the largest listed companies in Shanghai and Shenzhen tumbled 8.6 percent to 3,818.73 points, while the Shanghai Composite Index. SSEC lost 8.5 percent to 3,725.56 points.
China’s market gyrations have stoked fears among global investors about the broader health of the world’s second biggest economy, hitting prices of growth-sensitive commodities such as copper, which fell on Monday to not far from a 6-year low.
