Chinese Stock Investors Seek a Savior, or a Scapegoat

Chinese stocks are hurtling back toward earth, and the public fallout is fast getting ugly. After a dizzying ascent that saw the benchmark Shanghai Composite Index rocket from 2,185 on August 1, 2014, to 5,166 on June 12, it has since surrendered 24 percent of its value, wiping out more than $2.4 trillion in wealth in the grisly process. That’s bad news for China’s mom-and-pop investors, or xiao san, who had flooded the market in recent months, especially those who used borrowed money. It’s also bad news for the Chinese government, which now faces a simultaneous hit to the national bottom line and to Communist Party credibility, much of which is staked on stable economic development. Perhaps inevitably, the search has begun for someone else to blame.

During the market rally and the recent pain that has ensued, the government has utilized not only monetary and fiscal policy, but also its outsized voice in state media in an attempt to steady the market. Recently, little in its vast toolbox seems to have worked. On Saturday, June 27, the day following a vertigo-inducing 7.4 percent tumble in the Shanghai Index, the Central Bank announced cuts to interest rates and, the same day, said it would reduce the amount of capital banks were required to keep on hand, which would allow banks to pump more money into the financial system. In the announcement’s wake, four major publications focusing on the markets proclaimed a continuing bull market. The Securities Times wrote that the market was primed for a “slow bull” over the rest of 2015, echoing claims in a March article series in state mouthpiece People’s Daily that predicted a “slow bull,” one eventually “expected to challenge 4,000.” What read then as an optimistic prediction had come, by mid-2015, to look like a floor that the government would backstop.

But on Monday, June 29, the Shanghai Index took another tumble. That evening, the Chinese treasury announced that it would consider allowing pension funds to invest directly in the market. Such funds collectively hold about $460 billion — the influx of some of that capital could raise, or at least stabilize, faltering stock prices. The next day, June 30, was the best for Chinese stocks in weeks. That evening, Bai Yansong, a respected political commenter who anchors a television show called News 1+1 for state-run China Central Television, remonstrated those looking to state-run pensions to act as “a great savior, coming in waves like the People’s Liberation Army.” Bai pointed out the law allowing pensions to invest was only a draft; in passing, he noted that June 30 had been a good day, “with aunties in trading halls everywhere singing the national anthem,” invoking a (possibly apocryphal) report that had appeared online the day before. Bai’s comment was meant as a cautionary tale, although images of smiling, middle-aged women singing patriotically in front of backlit stock boards seemed to gain more media traction than his admonitions.

The flip side of the implication that those who invest love China is that those who sell or gainsay the market do not. About the same time that Bai was trying to reason with his viewers, a rambling article packed with invective and bereft of evidence went viral on massive mobile platform WeChat, accusing the United States Federal Reserve of orchestrating the recent swoon by jiggering U.S. interest rates to keep capital in U.S. equities, instead of flowing into China. The presence of wealthy funders, the author wrote, was like well-positioned fighters on a “battlefield.” If China could attract more risk capital into domestic stock markets, “Chinese production would move up the value chain, swallowing American industry and allowing us to stomp on America’s corpse.”

Also on June 30, state-run digital magazine the Paper shared a tongue-in-cheek cartoon that repurposed old Communist propaganda showing a woman and child wishing Chinese soldiers well as they return from battle. In the remixed images, the troops are marked with the names of state-run financial institutions like China International Capital Corp. and Central Huijin. “During the days you were gone,” the woman tells the soldiers, “the foreign devils harmed the villagers greatly.” A July 2 article in online portal Sina Finance called “Someone Is Maliciously Shorting A-Shares” invoked U.S. financier George Soros’ short sales of Malaysian ringgit during the 1997 Asian financial crisis, drawing a parallel between those short sales and the Chinese stock market’s current plight. Online rumors have fingered Goldman Sachs for short selling in the Chinese market too.

Social tensions are growing as China’s retail investors, once so eager to enter the market, seem to have lost a bit of their collective nerve. July 1 began with a loss of over 5 percent; the morning of July 2, shortly after stocks opened even worse, a woman leaped to her death in a Shanghai shopping mall. A Chinese-language report (warning: graphic images) wrote that while the reason for her suicide was not immediately clear, “morning markets were diving to 3,911” when she took her life. Online outlet China News reported that another woman in her 30s lost about $640,000 in recent gyrations and now “trembles” at the mere mention of the word “stock.”

Because some investors expected — or hoped — that the government would act as a shield against massive losses, the recent swoon ultimately hits at the state’s credibility. After the close of trading on Friday, July 2, the market had fallen below 4,000, the floor that the government had once implicitly vouchsafed. That evening, with recent government measures foundering, state agency Xinhua published an open letter from a group of five finance professors complaining about the drop, which it called a “near disaster.” It found the failure of state-driven efforts to stabilize the markets “inexplicable.” Among other factors, the letter blamed experts, reporters, and bloviators for “irresponsibly” bad-mouthing Chinese stocks. It warned darkly that the market fall was not only damaging to middle-class aspirants, but to Chinese society and the China dream — “and cannot be taken lightly.”

The letter is certainly correct about the potential effect on retail investors, many of whom are likely to spend the coming weekend anxiously. A July 1 article in the Paper described the recent grim scene in some trading houses. The piece quotes one older man, surnamed Ni, who complains, “The government has already spoken, but yesterday afternoon didn’t take a positive turn. We’ll just have to wait more.” By the afternoon, stocks had dropped further. “The women who sung the national anthem yesterday,” the article writes in reference to those singing aunties, “were silent.” The older man surnamed Ni left the trading hall in disgust. Another gentleman surnamed Wu, who was the investor in the family, complained to the reporter that “the last two weeks have affected my status in the family.” When things were good, he spoke for the household. But for the last two weeks, “all the cooking, dishwashing, and sweeping have been up to me.”

Zara Zhang and Bethany Allen-Ebrahimian contributed research.

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