One of the problems with an immature and highly regulated market is exactly what we currently see happening in China. Neither the Chinese government or the Chinese investors (many of whom are new and completely uneducated) have no idea on how to respond to the Chinese Market crash. The government’s response has been to step in and try and stop the bleeding by halting trading in many shares. Throughout the past week, there has been as few as 10% of the companies listed on the exchange’s trading. Suspending of shares and restricting trading only exacerbates any selling and creates more panic. As the rest of the world knows a market correction is an expected occurrence, and the response has shown how inexperienced China is with financial markets.
This inexperience has helped lead to China losing over 3 Trillion dollars of market capitalization in just 30 days. Retail investors many of whom do not have a college education were participating in the Chinese Markets on borrowed money thinking it was a can’t miss investment. These investors are rarely presented with information on the risks of investing, and on this side, China will need to tighten its regulations.
China is the world’s second-largest economy versus Greece which is the 44th ranked economy. Even though the equity markets are a relatively small portion of China’s overall economy the stock market crash and the response has severely damaged confidence in these markets which may result in China’s economy slowing even further.
For both the Chinese people and the Chinese government this has been a hard lesson about the other side of capitalism. For the government trying to control markets was probably the most significant mistake, it has made so far. At some point, the government will have to realize that loaning money to brokers to prop up shares won’t work for long and that market moves need to be allowed to happen no matter how painful and at what political cost. For the Chinese people, an education program in investing is long overdue.