The Dragon chasing its own tail

Few can have missed the carnage roiling Chinese stock markets recently. What’s interesting though is the emerging hubris from Western media that this is due to the intersection of communism and capitalism. The problem, they say, is that the purpose of markets is to allow free and open price discovery. However, they argue, a command economy like China can afford to tamper with this process and compel participants (like its state pension fund) to intervene in markets. The net effect is that when these interventions halt the slide, the millions of domestic retail investors borrow more money and buy in again in the vain hope of recovering their losses. But as we in the West all know, fundamentals are fundamentals and you cannot hold back the tide. The net effect is that the investment community gets more and more hooked on market intervention by central government.

But, before we all get too pleased with ourselves, isn’t this exactly what has been going on with quantitative easing in the US and Europe? The only difference is that the addicts aren’t Chinese farmers but pension funds and other asset managers.