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China's Stock Market Stumbles Impact Government's Credibility

FILE - An investor gestures in front of the stock price monitor at a private securities company in Shanghai, China.
FILE - An investor gestures in front of the stock price monitor at a private securities company in Shanghai, China.

Mainland China's two stock markets saw huge growth over the past year, and as the country's state-backed media forecast even-higher returns, millions of middle class Chinese bought into the soaring markets.

But since June 12, the markets have lost nearly $3 trillion dollars and the government has been publicly trying to reassure panicked investors by pumping billions of dollars back into the faltering market, ordering state-backed companies to buy shares, and loosening banking policies to provide more capital as the markets seize up.

China's government has played a huge role in the country's extraordinary economic rise over the past few decades, and the sudden market decline has been a rare public stumble. Stock markets around the world routinely go through declines, despite government efforts to prevent them.

But Beijing's failure to halt the sagging markets through a series of aggressive moves in recent days has tainted the government’s credibility, said Kung Ming-hsin, vice president of the Taiwan Institute of Economic Research in Taipei.

“Many begin to question… if China’s grip on its economy or capability of bolstering its economy may no longer be as tight as many assume,” he said. “That will affect capital flows in and out of China as a result of weakened confidence.”

The stock market stumbles could also bruise the President Xi Jinping administration’s ambition to be the region’s financial leader following its initiatives in establishing the Asian Infrastructure Investment Bank, Kung argues.

“It’s not merely a matter of economic power, it’s more about the rule of law, [financial] system and flexibility. In this regard, China seems to be unprepared,” Kung said.

Though Beijing has grappled with bigger headaches, such as bursting property bubbles and economic slowdown, Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch Ratings, agrees that its credibility beyond economic issues is also on the line.

“That may be a kind of secondary consideration really from their point of view. Clearly, they are sort of more concerned with taking financial instability risk off the table, and possibly, as well with an eye on, kind of, social stability,” Colquhoun said.

State-backed media in China have frankly assessed the stock market fall this week as “unprecedented,” and said the government's efforts to stop the fall have not worked as quickly as hoped. Editorials have urged “endurance” among the public to weather the downturn, and emphasized that the government's aggressive efforts to stop the halt will eventually work.