China’s stock market began the week with its biggest single-day plunge in more than eight years. Overnight, that selling continued. But what’s the story behind those falling numbers? HPR’s Bill Dorman has some context in today’s Asia Minute.
A country’s stock market is not the same as its economy. Professors and textbooks will tell you a stock market is supposed to be an economic predictor—one indication of where an economy is heading. That’s because in an open capitalist system, the market is built on the earnings of publicly-held companies that comprise a given stock index…more precisely on the expectations for future earnings, or profits.
But China’s market is different. The government can and at times has seized an extraordinary amount of control over certain aspects of trading. It’s banned large shareholders from selling, allowed companies to suspend trading in their shares without announcing any reason, even criminalized the practice of short selling—betting that a stock will decline in value.
Some market commentary at the start of the week focused on what the true extent of China’s economic slowdown may be and how much of that reality is now priced into a stock market whose main index still finished Monday’s trading 70% higher than it was a year earlier.
Another point: When does a continued sell-off rise to the level of a political embarrassment? That leads to the question of how much control authorities will try to exercise over this market volatility, and how much of that behavior is truly under their control.