Call it irrational exuberance with Chinese characteristics. In August, a fascinating campaign unfolded in China’s state-run media, prodding citizens to pile into stocks. In one week alone that month, the official Xinhua News Agency ran at least eight articles touting the wonders and patriotic virtue of owning equities. The People’s Daily and local television channels joined in what analysts agreed was a Party-sponsored drive to bolster a sagging market.
The preceding few months had been a bloodbath. By the end of May 2014, the Shanghai Composite Index had lost $460 billion of market value in just three years. Presumably, officials figured that igniting a stock rally would boost confidence as President Xi Jinping recalibrated the economy away from excessive investment and debt and toward a “new normal” of slower growth. With foreign investors dubious, Beijing looked to households. The government augmented the PR blitz with regulatory sweeteners, reduced fees for trading and opening new accounts, and an orchestrated series of investor presentations by China’s biggest banks.
The charm offensive worked. By early September, the Shanghai Composite had surged to a 15-month high. That brought even more of China’s 1.4 billion people into the A-share market, pushing the index up another 40 percent in the past three months alone. Never mind that the economy is growing the slowest in 24 years, industrial profits are down 8 percent year-over-year, default risks are rising and overseas analysts are churning out apocalyptic crash narratives: Chinese are betting their savings on bourses that seem more like casinos than rational marketplaces. The run-up makes then-Federal Reserve head Alan Greenspan’s 1996 warning about a U.S. stock bubble seem quaint.
Read Full Article HERE