After its market intervention, Beijing faces other challenges

ONE can debate the merits of the Chinese government's intervention in the country's equity markets, but what is more certain is that Beijing now faces a number of challenges because of the actions it has taken to try and rein in a stockmarket crash.

Recent weeks have been a nightmare for Chinese stocks. The Shanghai Composite Index fell as much as 32.1 per cent in just one month after hitting a one-year closing peak of 5,166.35 on June 8. The government stepped in on a number of occasions to try to stem the slide. In late June, interest rates were cut and pension funds were allowed to increase equity allocations. In early July, the government relaxed rules on margin trading, froze initial public offerings and even directly bought shares - all to prop up a market that was coming off a heady climb in which the index had swelled to more than 2.5 times its value from a year earlier.

Beijing's strong response has fuelled vigorous debate. Supporters argue that the government was compelled to stem an outflow of foreign capital and prevent a runaway crisis that would have complicated attempts at engineering a soft landing for a slowing economy. Critics say that the measures leave the government holding a massive equity position that will be a headache to unwind, and that they send the wrong message about the government's willingness to interfere with market forces.