1050x300-MS-LETTING CHINA'S BUBBLE BURST

Letting China's Bubble Burst

Author(s): Michael Spence

Date: Aug 11, 2015

Theme(s): China

Publications: Opinions & Speeches

Academic Council Chairman Michael Spence highlights the need for China's government to develop its regulatory and institutional institutions to protect its financial markets.

The problems with China’s economic-growth pattern have become well known in recent years, with the Chinese stock-market’s recent free-fall bringing them into sharper focus. But discussions of the Chinese economy’s imbalances and vulnerabilities tend to neglect some of the more positive elements of its structural evolution, particularly the government’s track record of prompt corrective intervention, and the substantial state balance sheet that can be deployed, if necessary.

In this regard, however, the stock-market bubble that developed in the first half of the year should be viewed as an exception. Not only did Chinese regulators enable the bubble’s growth by allowing retail investors – many of them newcomers to the market – to engage in margin trading (using borrowed money); the policy response to the market correction that began in late June has also been highly problematic.

Given past experiences with such bubbles, these policy mistakes are puzzling. I was in Beijing in the fall of 2007, when the Shanghai Composite Index skyrocketed to almost 6,000 (the recent peak was just over 5,000), owing partly to the participation of relatively inexperienced retail investors.

 

This article first appeared in Project Syndicate on July 29, 2015.

The views expressed in this article are the author’s own and do not necessarily reflect Asia Global Institute’s editorial policy.