Should the government have intervened?

CHINA FINANCIAL - In Brief 09 Jul 2015 by Michael Pettis

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After a terrifying beginning with Shanghai down 3.2%, markets turned around dramatically and Shanghai closed up 5.8% on the day. But 194 more companies suspended trading today. Over half of all companies now don’t trade. As I suggested yesterday, it wasn’t the subtle measures that proved most effective but rather outright bans on selling and large concerted buying, including share buyback pledges from nearly 300 SOEs. Is this the end of the “correction”? Maybe, but only the foolish know for sure. I still think Beijing will eventually halt the slide and set off another rally, but not because there is value at these prices. The rally has always been about excess liquidity and the widespread belief that Beijing’s guarantee now extends to the stock market, and I think with last week’s and this week’s intervention Beijing has invested too much of its credibility to back down. But the intervention hasn’t been without controversy. In an angry article in Caixin Ling Huawei argues that there had been no threat to the country’s financial system, and that “only a systemic risk that threatens financial stability justifies a government bailout”. Yesterday I pointed out that unless value investors are confident that they have reliable information and understand the rules of the game, they will refuse to participate. Beijing’s intervention, Ling argues, can only have undermined whatever confidence there might have been. But intervene they did, so now unless Beijing can disentangle the market’s performance and its own credibility, the choices seem limited. Is disentangling possible? I don’t know, but if it is, someone very senior will have to take responsibility for some pretty big de...