Skip to main content
SpringerLink
Log in

Saving China’s Stock Market?

  • Research Article
  • Published:
IMF Economic Review Aims and scope Submit manuscript

Abstract

We estimate the value creation for the stocks purchased by the Chinese government between the period starting with the market crash in mid-June of 2015 and the market recovery in September. We find that the government intervention increased the value of the rescued non-financial firms by RMB 206 billion after netting out the average purchase cost, which is about 1% of the Chinese GDP in 2014. The short-term value creation came from the increased stock demand, the reduced default probabilities, and the increased liquidity. The intervention may come at a long-run cost of creating moral hazard, preventing price discovery, creating more uncertainty, and damaging government credibility.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2

Similar content being viewed by others

Notes

  1. Based on the exchange rate on June 30, 2015 (RMB 6.11 per US dollar), the loss is roughly 3 trillion US dollars.

  2. The CSF was established in 2011 to lend to securities brokerages to support margin lending to stock investors.

  3. The CCH is a wholly owned subsidiary of China Investment Corporation, with its own board of directors and board of supervisors. It is an organization by which the Chinese government can act as a shareholder for the big four state-owned banks and some other banks.

  4. See Allen et al. (2015) for a study on the disconnection between China’s economic growth and the stock market performance.

  5. See Miao and Wang (2012, 2014, 2015, 2018), Miao et al. (2015a) and Miao et al. (2015b).

  6. See Acharya et al. (2016) for a study on the wealth management products in China.

  7. Under the CSRC regulations, any listed stock must be traded at prices within a lower limit and an upper limit in any trading day. The lower (upper) limit is the price level 10% below (above) the close price in the previous trading day.

  8. There are other investment vehicles funded by the China Securities Finance Corporation, a stock market stabilization fund, as well as the Wutongshu investment platform, the equity fund owned by the central bank of China. We did not include stocks purchased by those investment vehicles and shadow funds due to data limitations. Therefore, the purchased stocks included in our sample might underestimate the total amount of the rescue plan.

  9. Financial firms have totally different balance sheets and profit sources compared with non-financial firms. Taking banks as an example, a majority of assets of banks are the loans lent to non-financial firms.

  10. The result is available upon request.

References

  • Acharya, Viral V., Qian Jun, and Zhishu Yang. 2016. In the Shadow of Banks: Wealth Management Products and Bank Risks. Working Paper, SAIF.

  • Allen, Franklin, Susan C. Shan, Jun Qian, Julie L. Zhu. 2015. Explaining the Disconnection Between China’s Economic Growth and Stock Market Performance. Working Paper, SAIF.

  • Amihud, Yakov. 2002. Illiquidity and Stock Returns: Cross-Section and Time-Series Effects. Journal of Financial Markets 5: 31–56.

    Article  Google Scholar 

  • Bacchetta, Philippe, Tille Cedric, and Eric van Wincoop. 2012. Self-Fulfilling Risk Panics. American Economic Review 102 (7): 3674–3700.

    Article  Google Scholar 

  • Benhabib, Jess, Xuewen Liu, and Pengfei Wang. 2015. Sentiments, Financial Markets, and Macroeconomic Fluctuations. Journal of Financial Economics 120 (2): 420–443.

    Article  Google Scholar 

  • Bharath, Sreedhar, and Shumway Tyler. 2008. Forecasting Default with the Merton Distance to Default Model. Review of Financial Studies 21: 1339–1369.

    Article  Google Scholar 

  • Bian, Jiangze, Zhi Da, Dong Lou, and Hao Zhou. 2017a. Leverage Network and Market Contagion. Working Paper, Tsinghua University.

  • Bian, Jiangze, Zhiguo He, Kelly Shue, and Hao Zhou. 2017b. Leverage-Induced Fire Sales and Stock Market Crashes. Working Paper, University of Chicago.

  • Brogaard, Jonathan, Dan Li, and Ying Xia. 2016. Stock Liquidity and Default Risk. Journal of Financial Economics 124: 486–502

    Article  Google Scholar 

  • Brunnermeier, Markus, and Pedersen Lasse. 2009. Market Liquidity and Funding Liquidity. Review of Financial Studies 22: 2201–2238.

    Article  Google Scholar 

  • Chen, Hui, Anton Petukhov, and Jiang Wang. 2016. A Dynamic Model of Circuit Breakers. Working Paper, MIT.

  • Chen, Ting, Gao Zhenyu, He Jibao, Jiang Wenxi, Xiong Wei. 2017. Daily Price Limits and Destructive Market Behavior. NBER Working Paper.

  • Chen, Zhuo, He Zhiguo, and Liu Chun. 2017. The Financing of Local Government in China: Stimulus Loan Wanes and Shadow Banking Waxes. Working Paper, University of Chicago.

  • Cheng, L.T.W., J.K.W. Fung, and K.C. Chan. 2000. Pricing Dynamics of Index Options and Index Futures in Hong Kong Before and During the Asian Financial Crisis. Journal of Futures Markets 20: 145–166.

    Article  Google Scholar 

  • Chi, Yegang, and Xiaoming Li. 2017. Beauties of the Emperor: Investigations of an Opaque Stock Market Bailout. Working Paper, Shanghai Jiaotong University.

  • Crosbie, Peter, and Jeffrey Bohn. 2003. Modeling default risk. KMV white paper series.

  • Huang, Yi, Marco Pagano, and Ugo Panizza. 2016. Local Crowding Out in China. Working Paper, Graduate Institute, Geneva.

  • Liu, Xiaolei, Jiajie Xu, and Ninghua Zhong. 2017. Trading Restrictions as a Channel of Financial Contagion: Evidence From China’s Stock Market. Working Paper, Beijing University.

  • Merton, Robert. 1974. On the Pricing of Corporate Debt: The Risk Structure of Interest Rates. Journal of Finance 29: 449–470.

    Google Scholar 

  • Miao, Jianjun, and Pengfei Wang. 2012. Bubbles and Total Factor Productivity. American Economic Review 102: 82–87.

    Article  Google Scholar 

  • Miao, Jianjun, and Pengfei Wang. 2014. Sectoral Bubbles, Misallocation, and Endogenous Growth. Journal of Mathematical Economics 53: 153–163.

    Article  Google Scholar 

  • Miao, Jianjun, and Pengfei Wang. 2015. Banking Bubbles and Financial Crises. Journal of Economic Theory 157: 763–792.

    Article  Google Scholar 

  • Miao, Jianjun, and Pengfei Wang. 2018. Asset Bubbles and Credit Constraints. American Economic Review 108: 2590–2628.

    Article  Google Scholar 

  • Miao, Jianjun, Pengfei Wang, and Xu Zhiwei. 2015. A Bayesian DSGE Model of Stock Market Bubbles and Business Cycles. Quantitative Economics 6: 599–635.

    Article  Google Scholar 

  • Miao, Jianjun, Pengfei Wang, and Jing Zhou. 2015. Asset Bubbles, Collateral, and Policy Analysis. Journal of Monetary Economics 76: S57–S70.

    Article  Google Scholar 

  • Morck, Randall, Andrei Shleifer, and Robert W Vishny. 1988. Management Ownership and Market Valuation: An Empirical Analysis. Journal of Financial Economics 20: 293–315.

    Article  Google Scholar 

  • Sharpe, F.William. 1964. Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk. Journal of Finance 19: 425–442.

    Google Scholar 

  • Song, Zheng, and Wei Xiong. 2018. Risks in China’s Financial System. Annual Review of Financial Economics 10: 261–286.

    Article  Google Scholar 

  • Su, Yuli, Yewmun Yip, and Rickie Wong. 2002. The Impact of Government Intervention on Stock Returns: Evidence From Hong Kong. International Review of Economics and Finance 11: 277–297.

    Article  Google Scholar 

  • Vassalou, Maria, and Yuhang Xing. 2004. Default Risk in Equity Returns. Journal of Finance 59: 831–868.

    Article  Google Scholar 

  • Veronesi, Pietro, and Luigi Zingales. 2010. Paulson’s Gift. Journal of Financial Economics 3: 339–368.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Graduate Institute, Geneva, Maison de la paix, Chemin Eugene-Rigot 2, 1202, Geneva, Switzerland

    Yi Huang

  2. CEPR, Washington, DC, USA

    Yi Huang

  3. Department of Economics, Boston University, 270 Bay State Road, Boston, MA, 02215, USA

    Jianjun Miao

  4. ICFS, Southwestern University of Finance and Economics, Chengdu, China

    Jianjun Miao

  5. CEMA, Central University of Finance and Economics, Beijing, China

    Jianjun Miao

  6. Department of Economics, The Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong

    Pengfei Wang

Authors
  1. Yi Huang
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Jianjun Miao
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Pengfei Wang
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Jianjun Miao.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Electronic supplementary material

Below is the link to the electronic supplementary material.

Supplementary material 1 (rar 388 KB)

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Huang, Y., Miao, J. & Wang, P. Saving China’s Stock Market?. IMF Econ Rev 67, 349–394 (2019). https://doi.org/10.1057/s41308-019-00079-z

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/s41308-019-00079-z

JEL Classification

Search

Navigation