China’s Stock Market Is Falling Again. This Was Entirely Predictable.

Sorry, buddy.


For a little while, China’s stock market seemed to be rallying from the nausea-inducing crash that wiped out a third of its value in a month. Now, it’s back to falling, albeit a little more slowly. Over the past two days, the Shanghai Composite Index is down 4 percent. Tally the ups and downs, and it’s off about 26 percent from its June heights.

There are a few reasons why shares are dipping again. But one of the biggest, as the Wall Street Journal notes, is simply that investors are finally free to buy and sell stocks like normal again. Most of them, anyway. At one point last week, trading had been suspended for more than half of all listed corporations on China’s markets. Currently, only about a quarter are still sidelined. As more companies have resumed trading, “they’ve pulled money away from other stocks … causing the overall market to go down,” as one source told the Journal.

This speaks to the bigger flaw inherent in China’s attempts to keep its stock market afloat. In the last couple of weeks the government tried just about every intervention imaginable to support prices. It more or less ordered brokerages to buy. It loosened rules about borrowing in order to purchase shares. And, yes, it let half the market go idle. (Chinese stocks automatically stop trading once they fall 10 percent, but investors seemed to think the number of companies asking for pauses was “unusually large.”) The problem is that all of these approaches were more or less temporary fixes and did nothing about the fact that Chinese investors are deeply overleveraged, which has been one of the main forces driving stocks down. It was predictable that as the government loosened its grip, the fall would start again.