China takes desperate measures to stop stock drop

A hodgepodge of desperate measures has finally stopped the Chinese stock market’s monthlong spiral, which has generated a $3 trillion loss in share value since its mid-June peak. At the market’s close on Thursday, the Shanghai Composite rose 5.8 percent, its biggest gain in six years.

But China's markets remain volatile, as about half of their 2,800 stocks have suspended trading to cut losses. Since June 12, the Shanghai Composite Index has fallen 30 percent, following a 150 percent increase in the last year. In response to the dive, Beijing rolled out a number of measures: Authorities have banned shareholders with more than 5 percent stakes from selling for six months, paused initial public offerings, and urged state-owned companies to buy up shares.

The extensive measures halted China’s move toward liberalizing its state-dominated economy and reveal the government's fears financial instability could lead to social unrest. Analysts predicted a stock-market bubble earlier this year as everyday citizens made money off the share-price boom even as economic growth in China slowed.

State media encouraged people to buy stocks, and the government lifted the ban on margin trading, borrowing money to buy stocks. As Patrick Chovanec, managing director at Silvercrest Asset Management, told Vox, people turned to the stock market for big returns after the Chinese property market dropped and margin lending exploded. Most of the investors are ordinary people with little knowledge or experience in finance, with two-thirds lacking even a high school diploma, according to Fortune.

The rising stocks encouraged companies to issue shares, and in the first half of the year, Shanghai led the world in initial public offerings. But analysts said the increased shares overwhelmed the market and pushed down prices.

“China’s stock market had become detached from the reality of China’s own economy, and appallingly overvalued,” Chovanec noted in a Twitter post. “This is gravity taking effect.”

But the Chinese government isn’t allowing the market correction many say is necessary. In the past week, a group of 21 state-owned brokerages pledged to buy $42 billion worth of shares in major state companies to help stabilize the market. The People’s Bank of China has cut interest rates to record lows, and Beijing has relaxed lending rules to allow more people to borrow to buy stocks.

Experts said the wave of trading suspensions—occurring mostly outside government regulation—could have a negative effect. Instead of stabilizing the market, they could add to the selling pressure by transferring it to other shares that remain active. Jackson Wong, an associated director at United Simsen Security, said the strategy shows “how immature the China market is.”

The direct impact on American investors is minimal, as foreign investors have only been allowed to trade in the Chinese stock market since October, and are required to purchase stock in Hong Kong. While the stock market still plays a small role in China, if it causes the economy to slow, the effects will be felt much more strongly in the rest of the world.

The Associated Press contributed to this report.