When it comes to the China bourse, it's still better to tread with caution

A CENTRALLY planned economy in China is widely seen as a good thing, particularly in the aftermath of the 2008 financial crisis when China unleashed a stimulus package worth four trillion yuan (S$842 billion then) that was to boost consumption, among other wide ranging objectives. It was almost as if its so-called command economy, in which central government calls the shots, could do no wrong.

But the government's recent intervention to stem a stockmarket rout, that at its worst wiped out more than US$3 trillion in value, has seemed to be an experiment that could well have gone awry. While the stock market has stabilised of late, the moves have drawn mostly negative reactions from observers.

To recap, China's domestic equity market has been on a bull trend from the lows in 2009, fuelled by liquidity and easy margin financing. The market hit a multi-year high in June, when margin financing also peaked at 2.2 trillion yuan. Since then, due to a variety of factors including perceived overvaluation, it has plummeted by more than 30 per cent. While the government's slew of responses appears to have eventually cushioned the plunge, the intervention is raising serious questions on the potential economic fallout, the credibility of the government and whether the pace of internationalisation of the stock market could slow significantly.