Opinion

Uncertainty in Chinese stocks shakes faith in government

The relationship between perception and reality has always been at the core of economics, and nowhere has that been more true than in China. Recent events in the markets have shown that, given enough time, reality will always ruin the fun. The Shanghai Composite fell almost 8.5 percent on Aug. 24, now known as “Black Monday,” resulting in reverberations throughout the world.

However, what is most concerning about this fall is not the actual economic damage, but how this event has shaken faith in the Chinese government.

The tumble shouldn’t have come as a surprise. The Shanghai Composite index, the sum value of companies on the exchange, has been falling steadily over the past few months, from a peak at above 5,000 to below 3,000.

The significance of this drop is ultimately uncertain. Months beforehand, people had been calling the exchange overvalued. Its dropping in value may just mean a return to reason. If so, the reactions around the world have been anything but reasonable.

On paper, this change seems inconsequential. The Shanghai Composite has made quick recoveries, as have most other markets, though the position of the exchange is still precarious. On Tuesday, the composite closed after a 3.55 percent fall, only to close on Wednesday with a 4.9 percent spike.

Perhaps the most important response to these events is that of the Chinese government. In a misguided attempt to save the exchange, they enacted policies such as ordering share buybacks to hold the price up.

These actions are by no means unprecedented, even in more established markets. For example, the American government purchased shares of car companies in the 2008 recession. However, what sets the Chinese response apart is the speed at which they chose to do so, signaling that the government had not fully thought out their actions.

Ultimately, these events have marked an important turning point in terms of perception: all faith in the Chinese government’s ability to control its economy, let alone the stock exchange, has evaporated. If the government is willing to interfere with the market, it will be difficult for investors to justify placing their money there.

China is presented with two choices. Neither of these choices is particularly compelling: either they abandon their attempts to control the economy, or they double down in an attempt to save face. This, coupled with the slowing GDP growth, present Chinese leaders with their first major economic challenges in a while.

Whether they are able to navigate successfully remains to be seen.

Andrew Langen is a junior majoring in economics and math.

September 16, 2015

Reporters

Andrew Langen


ONE COMMENT ON THIS POST To “Uncertainty in Chinese stocks shakes faith in government”

Around the Web
  • Miami Herald
  • UM News
  • Error

With the University of Miami season opener closing in, the next starting quarterback has yet to be n ...

The second fall scrimmage, closed to the media and public, is over. University of Miami coach Mark R ...

1. DOLPHINS: Fins any good? 'Dress rehearsal' may tell: Opening win, then lopsided loss. W ...

University of Miami linebacker Jamie Gordinier has had another unfortunate setback, effectively side ...

The calmest coach on the planet got mad Friday after football practice. University of Miami coach Ma ...

UM’s new chief academic officer holds some 40 patents, and in 2017 was inducted into the National Ac ...

University of Miami students and researchers are blogging during a month-long expedition in the Gulf ...

María de Lourdes Dieck-Assad, a world-renowned economist and former ambassador, fills a new role for ...

Through the U Dreamers Grant, DACA students find essential support as they pursue their college degr ...

UM students talk about their internships up north in a city that never sleeps. ...

RSS Error: A feed could not be found at http://www.hurricanesports.com/. A feed with an invalid mime type may fall victim to this error, or SimplePie was unable to auto-discover it.. Use force_feed() if you are certain this URL is a real feed.

TMH Twitter Feed
About TMH

The Miami Hurricane is the student newspaper of the University of Miami in Coral Gables, Fla. The newspaper is edited and produced by undergraduate students at UM and is published weekly on Thursdays during the regular academic year.