A piece by Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm's chief economist, and who is now a senior fellow at Yale University's Jackson Institute of Global Affairs and a senior lecturer at Yale's School of Management.

I've tried to summarise it, not very successfully ... it's a detailed piece.

Roach argues:

  • Market manipulation has become standard operating procedure in policy circles around the world
  • All eyes are now on China's attempts to cope with the collapse of a major equity bubble
  • But the efforts of Chinese authorities are hardly unique
  • The leading economies of the West are doing pretty much the same thing - just dressing up their manipulation in different clothes

Quantitative easing

  • first used in Japan in the early 2000s
  • then in the United States after 2008
  • then in Japan again beginning in 2013
  • and now in Europe

In all of these cases, QE essentially has been an aggressive effort to manipulate asset prices ... direct central-bank purchases of long-dated sovereign securities, thereby reducing long-term interest rates, which, in turn, makes equities more attractive

China's efforts at market manipulation are no less blatant ... in response to a 31% plunge in the CSI 300 (a composite index of shares on the Shanghai and Shenzhen exchanges) from its June 12 peak, following a 145% surge in the preceding 12 months

Official Chinese actions:

  • A $480 billion government-supported equity-market backstop under the auspices of the China Securities Finance Corporation
  • A $19 billion pool from major domestic brokerages
  • An open-ended promise by the People's Bank of China (PBOC) to use its balance sheet to shore up equity prices
  • Also, trading was suspended for about 50% of listed securities (more than 1,400 of 2,800 stocks)
  • Unlike the West's QE-enabled market manipulation, which works circuitously through central-bank liquidity injections, the Chinese version is targeted more directly at the market in distress - in this case, equities

QE is very much a reactive approach - aimed at sparking revival in distressed markets and economies after they have collapsed. The more proactive Chinese approach is the policy equivalent of attempting to catch a falling knife - arresting a market in free-fall.

Several other noteworthy distinctions between China's market manipulation and that seen in the West:

  • Chinese authorities appear less focused on systemic risks to the real economy - the wealth effects are significantly smaller in China & much of the sharp appreciation in Chinese equity values was very short-lived, so speculators had little time to let the capital gains sink in and have a lasting impact on lifestyle expectations
  • Second, in the West, post-crisis reforms typically have been tactical, aimed at repairing flaws in established markets, rather than promoting new markets, hereas in China post-bubble reforms have a more strategic focus; equity-market distress has important implications for the government's capital-market reforms
  • Third, by emphasizing a regulatory fix, and thereby keeping its benchmark policy rate well above the dreaded zero bound, the PBOC is actually better positioned than other central banks to maintain control over monetary policy and not become ensnared in the open-ended provision of liquidity that is so addictive for frothy markets.
  • Finally, unlike in the West, China's targeted equity-specific actions minimize the risk of financial contagion caused by liquidity spillovers into other asset markets.

Roach concludes with a "where to from here?":

  • With a large portion of China's domestic equity market still closed, it is hard to know when the correction's animal spirits have been exhausted
  • The overhang of highly leveraged speculative demand is disconcerting ... in the 12 months ending in June, margin financing of stock purchases nearly tripled as a share of tradable domestic-equity-market capitalization
  • The likelihood of forced deleveraging of margin calls underscores the potential for a further slide once full trading resumes.