Why Single Out China?
Governments everywhere respond to stock market turmoil — not just China’s.
- Don't blame China. Developed economies also feature aggressive stock market interventions.
- China's intervention in its stock market is not exceptional -- just done more clumsily than in developed countries.
- China's stock markets are less than 20 years old. China has less experience in dealing with market crashes.
There has been lots of nattering recently about China‘s government becoming involved in the country’s stock market. That is, to say the least, an odd charge to level at China.
Just look at what occurs around the world. Indeed, it is in the so called developed economies that we see the most frequent and most aggressive market intervention.
Currently, the Bank of Japan is buying Exchange Traded Funds (ETFs) and real estate stocks on a large scale. Over the past year and a half, the Bank of Japan (BoJ) has aggressively bought the Nikkei index. These are operations that Japan’s central bank has done regularly since the market implosion in 1989.
In addition, the Japanese government has frequently instructed the national pension fund, the national social security fund, and the postal savings fund, as well as private sector funds —such as the large insurance companies and the city banks – to do the same.
The buying of ETFs and real estate stocks is part of the BoJ quantitative easing program. The central bank and other government investment pools are also buying commercial real estate.
We have seen various government market operations in Korea, Taiwan, Thailand, Malaysia and Singapore. Of course, 25 years ago, the Hong Kong Monetary Authority led the charge into the equity market, which speculators had pushed into a death spiral.
So, as far as Asia is concerned, government intervention of all types is not at all uncommon.
No different in the West
As for the rest of the world, one need only recall that the U.S. Federal Reserve Chairman through 2009-2014 never ceased to underscore that rising asset prices were a major objective of quantitative easing. While the Fed was not directly buying equities, it was working assiduously to drive money into equity markets.
Remember also that President Obama, during a press conference in the spring of 2010, advised his fellow Americans – Warren Buffet like – that it was a good time to buy shares. He also emphasized that the United States government would be doing everything it could to support asset prices.
In October 1987, the BoJ aggressively bought U.S. index futures during Asian trading hours — in Wall Street vernacular – in order to position the market for the opening, following the October 19th Black Friday crash of the New York market.
It was later known that this operation was done at the request of the U.S. Federal Reserve and Treasury. The two countries had apparently put a swap agreement in place over the weekend, so that the Japanese had all of the U.S. dollars they needed for this operation.
In 2007-08, France’s Caisse de Depot, on Elysee’s instructions, where the chief of staff was the former head of the French Treasury, bought the French stock market index, as well as the underlying shares, in order to support the crashing market.
In the summer of 2007, the Bank of Canada became the only buyer in the asset-backed securities market that had imploded and risked wiping out the pension assets of millions of people.
Clumsy, but not new
There are several such examples including the UK life-boat operation in the 1970s. One also remembers that in 2001-2002, several EU equity markets simply closed for a few days at the peak of market turmoil.
Thus, what we are seeing today in China is not exceptional. It may be done in a clumsier manner than in some places, but it is quite a common practice around the world.
China’s stock markets are less than 20 years old. More mature economies have simply had more experience of market crashes. As a result, governments are more practiced at intervening in markets and have developed larger panoply of instruments to do so.