The Chinese government’s massive stock market stimulus is having the opposite effect

It’s bad out there.
It’s bad out there.
Image: Reuters/China Daily Information Corp
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China’s stock markets cratered again today, despite the government’s stimulus efforts. The Shanghai Composite Index fell by 8.5% and the Shenzhen A-shares index lost 7% of its value.

Over the past 10 years, today’s drop was the second-worst on record:

The fall comes after the government reported a 0.3% drop in industrial profits in June, a sign that China’s economy may be weaker than thought. But the real reason the decline may be that investors are spooked by heavy-handed government measures that are supposed to support the market.

Just last week, it seemed that the government’s stimulus and support measures may have successfully run off the bears. After peaking on June 12, China’s markets dropped by more than 30% before a raft of stimulus measures, including freeing up more credit for retail investors to buy stock and state-owned company purchases, sent Shanghai’s index up 16% from its July 8 low.

The government’s desperate attempts to goose the market were actually a key reason behind today’s drop, analysts said: “Investors are afraid the Chinese government will withdraw supporting measures from the market,” Sam Chi Yung, a strategist at Delta Asia Securities in Hong Kong told Bloomberg. “Once those disappear, the market cannot support itself.”

In essence, then, it looks like investors are front-running the government—getting out before the official stimulus dries up. Today, what began as a fairly normal down day turned into a rout in that last hour of trading:

The stocks that sold off most severely by the end of the day were brokerages (link in Chinese), a sign that whatever investors are predicting about the future of China’s stock markets, it isn’t pretty.

Zheping Huang contributed reporting