Beware the Inv-Asian

If you've seen the news as of late, you'd notice that China is once again in the headlines. What?? China?? In the headlines??? How preposterous! But this time, instead of drawing attention for something blatantly disconcerting, it's something tame: their stock market. Or could their be more than what meets the eye?

China is not typically noticed for their stock exchange, but recently it has been all the talk in media outlets worldwide, and not for a particularly good reason. China's largest stock index has dropped dramatically in the latter half of 2015, returning back to significantly lower levels seen earlier in the year. However, there is something peculiar about this market crash. There's widespread panic, and yet the market has stabilized, though lower, following the large drop, so what makes China's predicament so noteworthy?

If you guessed that it was--once again--the government's fault, you were right!

In case you didn't know, red is not a good color for stocks

The stock market and the economy aren't always coordinated. The market doesn't always reflect the health of a nation's economy, and the economy isn't so reactive to the health of the stock market.  But it is correct to say that things the government dictates will have a particular reaction in the market. Often times, the government respects the strange, other-worldly nature of the workings of the market by letting it crash and burn and heal itself on its own because it's a grown market now and it needs to learn how to fix itself without depending on Papa Government's money. However, apparently Papa China can't let baby bird out of the flock quite yet and thinks it can save the day, because communism is alive and well and needs to do what it can to make sure every baby bird is flying as well as the other. As a result, here comes the government, invading the market to save the prosperity of its people. How does it do that exactly? And more importantly, why is it doing that?

Okay, China is just like every other nation; it has a central bank, that controls the monetary policies by altering things such as interest rates or government bonds.

At its best, it's a bank. At its worst, it's China's really, really bad financial advisor.

So, with the typical responsibilities of a bank, the People's Bank of China has been continuously cutting interest rates because inflation rates have been uncomfortably lower than what a healthy, growing economy typically wants to see. This would allow consumers to borrow more money, allowing them to spend more. That's all fine and expected from your average nation; but China doesn't like being average, so it breaks the norm, does the unthinkable, and starts controlling the stock market to save the day. Unfortunately for China, in this superhero comic, its beautifully built bridges, which let the markets run smoothly, are actually completely fragile and a terrible idea and causes literally everything on the bridges, that being the stock market, to plummet down more than a third of the way below China's sanity level.

Yea, the stock market isn't quite fond of its new room in the house, Papa China.

And, cue panicking investors, in 3... 2....1..... 

See, the problem was that China had projected a downfall in their current economic growth, considering the widespread success of their market in the last year, as well as the low inflation rates. If China's economy had reached its peak growth, that meant it was headed towards a downward curve of deflation and contraction, which no country wants to have on their plates. So, the government thought that if the market was more involved in the economy, and the government had more say, a rallying market could point to better days for China. Except, that's just not how it is. Unlike corporations and people in the United States, China's stock market has little impact on the prosperity of the people and companies. So, the government's invasion of the market only made things worse, because not only did it not fix problems that were not there, it also caused the crash of the indices, which still doesn't say much about China's actual economy. 

But, we can safely say, Papa China has learned a valuable lesson in all of this mess. It can't stay holding on to every one of its fledgelings forever, and its dear stock market can't continue to be a growing, successful supporter of the household unless Papa lets it be independent, and this is something China would surely never forget.

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