BEIJING—China’s aggressive response to plunging share prices undercuts its pledge to have the market play a decisive role in the economy and risks cementing investors’ belief that Beijing will always bail them out.
Over a tense weekend, the government oversaw several steps to stem the selling frenzy that sent the benchmark Shanghai Composite down 29% in three weeks as of Friday. Brokerage firms, mutual-fund managers and an investment arm of the government pledged to buy stocks. New share offerings were suspended, quotas for foreigners to buy stocks were increased and the central bank vowed to provide funds to help investors borrow to buy shares.
While the flurry of rescue moves may stem panic in the short term, some economists warned that if not implemented carefully, it could encourage another market bubble even as the existing one deflates. Investors are likely to conclude that Beijing will make good on even reckless investments, they say.
“You could’ve been excused as a punter for thinking there was no downside risk here,” said ING Group economist Tim Condon.
Full Story @ [Wall Street Journal]