After two days of massive losses that triggered worldwide economic downturns, the rally of the Chinese stock market is leading investors and analysts to suspect government manipulation of the market.
The Shanghai Composite Index has been in free-fall over the last three months. The index fell 11.8% in August. A five-session selloff drove the Chinese market so low that markets around the world tumbled in response.
Then suddenly Thursday, the Chinese market jumped 5%.
And again Friday.
Investors began to suspect government intervention in the market, with the government quietly buying up stocks with newly printed money from the Chinese Central Bank. The Chinese government is promoting a big celebration for the 70th anniversary of World War II next week and analysts believe they wanted investors in a good mood ahead of the events.
The market is closed September 3-4 for a national holiday.
“If the government sustains buying there are terribly negative consequences, such as impact to [People’s Bank of China’s] credibility and yuan credibility…Any bank can create money out of thin air, which is why confidence is so important,” David Cui, a strategist for Bank of America Merrill Lynch, told Marketwatch. “So if they keep printing money to buy high valued stocks, it will damage yuan credibility.”
“What’s happening is an act of desperation by China and it starts dragging down other countries with it,” said Bill Stoops, chief investment officer with Dragon Capital, told the L.A. Times. ”China’s police state economic model is falling apart.”