China remained a wonder for economic administration. It has beautifully blended market with government intervention and remained a Great Wall during the crisis of 2008. Even the adoption of some extra ordinary market practices competing with western capitalists was won many admirers.
But everything is over in the last few days when the stock market was nearly closed by the authorities fearing unstoppable crash.
During the last month, the Chinese market has lost nearly $3.4 trillion, which is nearly one and a half times of India’s GDP.
Admirers and critics both were shocked the way authorities failed to arrest the fall. In the effort of restoring the market, the extreme measures adopted by China also shows the depth of the problem as well as the helplessness of its economic management.
The option of using central bank liquidity to support the stock market is rarely exercised in history. Similarly, around seventy five percent of the equities can’t be sold with fresh regulations. In clear terms, China has closed down its stock market.
There was no comment about the event by the government and the Global Times remained silent on the entire issue.
Looking back, there many people who warned that Chinese market may come to a correction after seeing the uncharacteristic doubling of the stock prices.
Some of the policies in recent times particularly, the low interest policy also contributed to the market boom. Stocks became assets of high return in the context of declining interest rate. Excess liquidity has flown into the equity market.
Adding to these, the rising market has also driven the liquidity in the banks to flow into the market. An element of policy failure is visible in the present market debacle in the country.
But declining growth rate and exports were triggering factors for negative sentiments and a steep fall waiting to happen.
Now, China is no more the masters of economic management as we have thought for couple of decades. Its command economy style has some problems in dealing with the market activities.
The crisis also leaves many messages to emerging market peers like India. Growing market amidst slowing economy is a systemic danger. Creating excess liquidity for supporting investment and production may flow into the stock market; bringing a boom and an inevitable burst.