The intervention of the Chinese government when the country's stock market lost more than one-third of its value in mid-June did not surprise many people, but the timing and manner of the action has disappointed some.

A heated debate kicked off when China’s government intervened heavily in domestic stock markets that plummeted by more than one-third in mid-June, after doubling in value in the previous 18 months. Some market participants have lamented the risk associated with the Chinese Communist Party’s (CCP's) interference since it stopped market forces from restoring equilibrium independently. But the institutional failures that led to the market's downfall in the first place should also be addressed – as should the question of how better-timed intervention could have been beneficial, if not necessary.  

The government’s intervention in the stock market was profound. Some of the measures included easing margin financing regulation, the suspension of approved initial public offerings, freezing new share offers, setting up a market stabilisation fund, and making it illegal for large investors to dump shares over the next six months. 

Many have criticised the CCP’s attempts to halt what are considered inherent cycles in free financial markets. But China’s economy still operates in a unique fashion. It is simultaneously a planned economy with an interventionist state and one which is far less controlling in the jungle that is corporate compliance, for instance. The CCP’s stock market intervention cannot be seen as a surprise. 

Equally, it would not be surprising to see future market interference. Though liberalising financial sector reforms are under way, the CCP is still trying to balance its weighty history with the potential loss in legitimacy that liberalisation naturally generates. After all, the CCP has been able to maintain its grip on almost 1.4 billion people by delivering economic growth in exchange for a democratic political process. It will therefore continue to do anything to avoid breaking that promise. Social stability is key to CCP legitimacy. 

However, better-timed and pre-emptive state intervention could have helped avoid the stock market crash and the same social instability the CCP wants to avoid. Standardised monitoring of listed companies could have been the first step to avoiding an unsustainable stock market bubble. What was seen instead was struggling companies (about 80 in the first five months of 2015) being able to change their names and focus overnight to inflate their share prices, according to The Economist

If social stability remains a priority, the Chinese state would do well to also address the initial mis-selling of financial products, including local stocks, to retail investors. The suicide of a woman who jumped to her death in Shanghai's IAPM mall on July 2 has been attributed to the stock market crash. Suicides or near-suicides have also been known to happen in smaller Chinese cities when unregulated shadow banking institutions go bankrupt and do not pay retail investors who bought high-yielding wealth management products. “We have had instances in the past 18 months when these products have not paid and desperate people end up going on the roof of provincial government buildings to threaten suicide,” says one Beijing-based economist. 

Addressing policy flaws at the core of China’s financial markets is paramount if China wants to liberalise its financial sector to meet international standards. If not, its financial markets will remain unstandardised and bereft of functioning market and regulatory mechanisms that deal with the cyclical nature of the market model China is working to adopt. 

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