NNIP: Chinese policy makers losing credibility

Maarten-Jan Bakkum, senior Emerging Markets strategist at NN Investment Partner (NNIP) argues that the key problem of the Chinese stock market crash is the failed policy intervention by Chinese authorities.

The more-than-30% correction of the Chinese A-share market in less than four weeks and the inability of the government to stop the bleeding have created new doubts about the state of the Chinese economy, the financial-system risks and the effectiveness of Chinese policy makers. After the market had doubled in only twelve months, a correction of 30% in itself should not be a problem.

The rally was never backed by fundamentals. It happened because local investors expected more policy easing and it was made possible because of abundant margin lending. That the economy was decelerating rapidly and that capital outflows were accelerating was ignored by retail investors. So the correction was inevitable and necessary.

The problem only is that the authorities have tried to stop it. They have come with dramatic measures to stabilise the market, including direct stock buying by the central bank. So far without any success. This is the main problem now. The Chinese policy makers, who have managed the economic success of the last decades very well and who are seen, particularly in China and the rest of Asia, as infallible, when it comes to economic and financial management, are now losing their credibility rapidly.

This comes at a particularly bad moment, now that the economic policy easing of the past quarters should start to yield results. A serious deterioration in investor sentiment is likely to affect business and consumer confidence.

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