Chinese Government Struggles in Attempt to Stem Distress in Stock Market

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from The Wall Street Journal,

Authorities rush more emergency measures to halt what is turning into crisis of confidence.

The Chinese government struggled in vain Wednesday to prevent the distress in the country’s stock markets from spreading as it openly fought market forces it has pledged to give a larger role.

Early Wednesday, the Chinese authorities rushed out another raft of emergency measures to halt what is turning into a crisis of confidence in leaders’ ability to steer the economy. But before the day was over the equities selloff had spilled into offshore trading in the Chinese yuan and worsened a drop in global commodity prices.

It didn’t help that China’s central bank extended funds for loans to buy shares. Nor that the agency that oversees China’s oil giants and other state enterprises forbade them from selling their shareholdings.

The benchmark Shanghai Composite Index ended Wednesday 5.9% lower, after falling as much as 8.2% early in the session. The drop meant that $3.5 trillion yuan ($572.21 billion) in market value has been erased since a mid-June high—or a third of total capitalization.

“Market confidence has collapsed,” said Shen Jun, a strategist at BOC International Holdings Ltd., the investment-banking unit of state-owned Bank of China Ltd. Risks are growing, Mr. Shen said, that the stock-market crisis will “evolve into a financial crisis.”

Until now, the Chinese government has been widely applauded for its deftness in managing economic matters.

It also saddled the economy with debt, a property bubble and wasteful projects throughout the country. As part of a strategy to help the companies unwind the debts they had taken on in that push, policy makers encouraged stock investing.

Officials at the highest levels have talked up the stock market.

That “has created wealth for both the nation and the people,” Mr. Li said.

At the root of the latest market swing is the rapid expansion of loans by investors to buy shares, a relatively new trading tactic in China. So-called margin financing soared almost fivefold over the past year to about 2 trillion yuan ($322 billion) last month, official data show.

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