Chinese authorities are throwing everything at Shanghai stocks in order to stop the bubble bursting and having wider social or economic consequences for the Chinese economy.
In a Facebook post this afternoon Allianz’s Mohamed El-Erian has given a clear warning to investors, and the Chinese government, that they need to watch how these measures perform in coming days.
Lots of people will (and should) be keeping a close eye on Chinese stocks this week, starting with the government.
In partnership with brokerage firms, the authorities opted for a big bang package over the weekend to stabilize what had been a volatile and rapidly correcting market (chart below from cnbc.com). This intervention reflects concerns about the risk of an adverse economic and social fallout.
The key, as El-Erian, and anyone who has seen how markets like to push against “lines in the sand” is that “it did not take long for markets on Monday to test the robustness of the measures. The same is happening at the start of Tuesday’s session.”
Indeed, the Shanghai composite is down 3.7% in trade this morning with the CSI300 off 5.19%.
El-Erian warned the Chinese regulators that “failure to contain volatility could lead to another leg down in stocks.”
Indeed it might. But it’s hard to catch the air escaping from a bubble.