China’s Market Intervention Folly

By BURTON G. MALKIEL at The Wall Street Journal

The biggest drop in Chinese stocks in eight years Monday is another sign that Beijing’s efforts to prop up prices have failed. Moreover, the interventions themselves have made China’s equity markets more volatile and damaged their credibility in the long run.

To stabilize stock prices, Beijing has employed numerous techniques, including suspending trading for a time on well over half of listed A-shares. Short sales were banned, and major shareholders were prohibited from selling. New initial public offerings were disallowed.

China needs more professional participants in its equities markets. But why should institutions buy when the government can control if and when they can sell? And ordering state-owned enterprises and brokerages to buy stocks with borrowed money to shore up prices only reinforces the notion that the market is rigged.

Ultimately such actions increase risk levels and the required rates of return on equities. After all, it was the government’s encouragement of the public’s margin buying of stocks that contributed to the 150% increase in prices before China’s equity markets went south this summer.

The lesson from the stock-market instability is that continued economic growth will depend on continued economic restructuring, but growth will be compromised by endless bureaucratic interventions. A retreat from economic reform is the prime obstacle to continued Chinese progress.

When President Xi Jinping took office in March 2013, his two main goals were ending pervasive corruption in the economy and giving markets a “decisive role” in allocating resources. Progress on these two fronts, he said, would modernize the economy and lead to “the great renaissance of the Chinese nation.”

Mr. Xi recognized that too much economic activity was controlled by inefficient, corrupt and complacent state-owned enterprises and that (at least partial) privatization should be encouraged. By subjecting their ability to obtain financing

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