How Will China’s Stock Market Drop Affect Policy?

As China’s markets have melted down over the past month, wiping out over three trillion in wealth, some Chinese and foreign analysts, investors, and politicians have seen an upside in the market’s downturn. The fall of the overheated stock market might force the state to both clean up both the unregulated loans fuelling purchases and, more broadly, intervene less in equity markets and the broader economy. The market drop, according to this theory, might even foster massive discontent with the Communist Party and support for real political reforms, since unlike in most major economies it is not large institutions but retail investors---ninety million or so---who dominate Chinese investing.

But in reality, the Chinese stock market plunge is as likely to have the opposite effect. With Xi Jinping’ s government already linked, in many Chinese citizens’ minds, to a guarantee of faith in stocks, Beijing is not going to become more reformist. Fearful of public discontent, convinced that the state can right the stock market---and even before the market’s fall tightening laws on dissent---the government is likely to become more interventionist in the market, and possibly in the broader economy as well. Although these interventions might foster some short-term stability, they will not benefit China---or the world economy---in the long run.

For more on my analysis of how the stock market plunge will impact Chinese policymaking, you can read my latest article for Bloomberg.