The worst possible outcome of official China’s effort to support the country’s stock markets would be success. Failure — the result so far — does not reflect lack of inventiveness. Officials have made cash available for margin lending, lowered transaction fees, threatened “manipulators” with investigation, bought blue-chip stocks, allowed a quarter of the exchange (by value) to stop trading for an extended period, and, reportedly, pushed some short sellers out of the market.
Yet China’s correction has little to do with manipulation. The market is only returning to normal after big parts — though not all — of it became wildly overvalued. Yes, violent corrections can hurt the real economy. But intervening in this way is dangerous. It distorts price information that guides asset allocation, storing up trouble for the future; and it amounts to fiddling with private property, undermining the trust that underpins all markets.
Consider another uncomfortable question. Why is western central bank suppression of short-term interest rates and purchase of long-dated bonds so different? These are market interventions. These are designed to push investors into risky assets, increasing investment in the economy and — if the assets do as they are told and rise — creating a wealth effect that boosts consumption.