China’s state-rigged stock market is getting a state-mandated cooling-off period

“The government saves the market, investors are happy,” reads the sign.
“The government saves the market, investors are happy,” reads the sign.
Image: Reuters/Aly Song
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The Chinese government just announced that it will suspend stock trading on Sept. 3 and 4, according to the Shanghai Stock Exchange (h/t South China Morning Post’s George Chen) The official reason, as mandated by the securities regulator, is to commemorate the Japanese surrender (link in Chinese) that ended World War II.

The motive you won’t find on any Chinese government websites, however, is that the tougher the government makes it for people to trade stocks, the harder it is for people to sell—and therefore, the less likely the market is to resume falling. Cryptically, the official notice cited a secondary reason for the holiday: “related liquidation matters” to be undertaken by the China Securities Depository and Clearing Corporation Limited—the government’s margin-trading clearinghouse

The unexpected four-day weekend—Sept. 3 and 4 are a Thursday and Friday—is the latest move by Beijing policymakers to freeze the stock market in a state of suspended animation. Initial public offerings have been on hold since early July, and hundreds of companies have been allowed to suspend trading in an attempt to ride out market volatility. This is part and parcel of the government’s attempt to prevent the layers of debt piled into Chinese stocks for unravelling themselves—and tearing holes in bank balance sheets with them.

A major reason for doing this likely had to do with the colossal amount of margin trading driving market movements. (Margin trading lets investors bet borrowed money on stocks, often using the underlying stock or other shares as collateral. This magnifies both gains and losses.)

By freezing trading of (mainly) more volatile stocks, loosen restrictions on margin trading, and by pumping liquidity into brokerages, the government prevented prices from dropping far enough to trigger margin calls.

If the government hadn’t intervened, the markets were in a very real danger of entering an ever-accelerating downward spiral: companies and investors were using their stock as collateral for margin trading and corporate loans, and further drops would have required banks and brokerages to require even more collateral. As of late June, more than 2.5 trillion yuan ($400 billion) in stocks were used to collateralize around 750 billion yuan in loans, according to a recent note by Anne Stevenson-Yang, founder of J Capital Research.

The stock market is following a similar trend of government-engineered bubble, followed by regulatory meddling to thwart selling, that occurred with China’s property market, Stevenson-Yang noted.

“The early stages supported China Dream growth stories and legendary IPO wealth-creation events,” she wrote. “When the momentum can’t be sustained, we are brought to the June 12 stage. Through regulatory devices such as prohibitions on short selling and selling of long positions, massive infusions of new liquidity, loan rollovers and liberalized margins, suspended trading in shares not core to the State’s interest, collateral value is maintained at highly inflated levels.”

To be fair, the stock market usually closes on public holidays. However, the government only created this official work holiday in the last year. The nature of the holiday is in itself intriguing; during times of domestic strife, the government’s go-to distraction is to whip up anti-Japanese sentiment among the public. Whatever the case, it makes ”Victory Day,” as it’s called, an eerily convenient excuse to disrupt trading once again.

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