International Law

Keeping the Bubble Inflated

By Stan

Shanghai-listed Chinese stocks on Thursday won back all of the previous day’s steep losses but volatility likely means regulators are considering what else they can do to support the market.

Fearing that the abundant flow of new loans in the first half of the year will taper off, investors knocked down the Shanghai composite nearly 20 percent from a peak on August 4 before diving back in on Thursday to drive the index up 4.5 percent, the biggest daily gain since March 4. (Reuters)

Maybe I’m just revealing my ignorance here, but why should the government need to prop up the stock market, whose value had shot up recently due to stimulus money leakages, hot money inflows, and a sense internationally that China was one of the few markets in the world that had some upside to it — in other words, this was a lot of speculative money that created an unsustainable mini-bubble.

The market has corrected itself, to some degree, and even regained some of those losses at the end of the week.

So what’s the policy rationale for reinflating an unsustainable bubble?

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Full post as published by China Hearsay on August 22, 2009 (boomark / email).