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China’s Reaction To Its Stock Crash Will Not Be Enough

By doing too little too late, there will be economic and demographic consequences for decades

(Not intended to be investment advice, opinions are my own.)

China’s policy makers are trying to stem the Chinese stock market crash by preventing institutions and brokerages from either selling shares or using derivatives to short the market. This reaction tells me two things:

1. Policy makers in China are getting desperate.
2. Chinese policy makers misunderstand the problem and still think that the stock market crash is driven by overly negative (and in their opinion incorrect) sentiment rather than structural holes in the economy.

I think Chinese policy makers are wrong about point 2. China is facing real solvency issues in its local governments, financial sector, and real estate sector. The continued slide in real estate is especially worrisome as that sector is both a huge and important portion of its economy at 25% of GDP as well as the biggest store of its citizens wealth. Without drastic action China is facing a lost decade similar to what Japan experienced post the crash of its bubble.

Worrying signs