China’s stock market rally may hurt the economy

SOME call it 9/24 for short. On Sep 24 last year (2024) China’s officials decided to engineer a rally in the moribund stock market. The central bank, flanked by financial regulators, cut interest rates and bank reserve requirements. It also made it easier for companies to buy back their shares and for institutional investors to leverage their balance sheets. The markets took the hint. Buy “everything”, advised David Tepper, an American hedge fund manager.

A year later, the Shanghai Composite, an index of pretty much everything that can be bought on the Shanghai Stock Exchange, is up by about 40 per cent. The rally drew strength in its early stages from the promise of fiscal stimulus and the enthusiasm for homegrown artificial intelligence. More recently, it has gained momentum from the government’s efforts to discourage price wars and other ruinous competition, which, though good for consumers, are bad for the profits on which shareholders have the final claim.

Last month, the index surpassed 3,800 for the first time in 10 years. But the government’s ultimate goal was not merely to revive the market. It hoped the market would help revive the economy, too. Unfortunately, the economy has refused to take the hint.