Stock Market Plunge in China Becomes Litmus Test of Political Loyalty

July 7, 2015 Updated: July 8, 2015

After soaring to seven-year highs in June, China’s stock markets have plummeted badly—the Shanghai Composite, the main index, losing an astounding 29 percent in just a few weeks. Since the peak of the market on June 12, over $2.5 trillion in value has been wiped out. The result has been a political panic.

The Ministry of Finance and large brokerage houses have stepped into the breach, promising to pump nearly $20 billion into the market to maintain prices.

On the Shanghai and Shenzhen exchanges, as of July 8, nearly half of all companies have stopped trading, according to data by Wind Information, as cited by the Hong Kong-based Phoenix Television. After market close on July 7, more than 600 companies applied to have their tickers stop trading, which, added to those already suspended, brought the total number to 1,400. This means that prices are frozen where they last traded, but investors’ capital is trapped.

Elsewhere, the tried and true tactics of communist rule have also surfaced: conspiratorial rumors, censorship, and propaganda that seems aimed at turning the stock market into a litmus test of political loyalty to the Chinese Communist Party.

The first victims of this thrust have been newspapers that dared to report about suicides due to the market crash.

On July 4, the China Securities Regulatory Commission announced that it was punishing three Chinese media companies for reporting “fake news.” The much-feared Public Security Bureau was called upon to assist with the case.

The reports in question involved cases of individuals jumping off buildings and killing themselves—but officials said that the suicides were not due to the individuals having lost money in the market. They didn’t say how they were sure of this.

Having publicly pumped up the stock bubble to the extent it did, maintaining market prices became a test of regime credibility.

“The Chinese regime is trying to investigate rumors so that people dare not post stories online about how others commit suicide because of the fall in stocks,” said Zhu Xinxin, a former editor at Hebei People’s Radio Station, in an interview with Radio Free Asia.

“In fact, this results in any genuine story of people jumping off buildings not being reported. The reason behind this is the fear of social unrest, which will lead to the collapse of the regime’s ‘stability maintenance’ system,” Zhu said.

Market collapses have in the past triggered social unrest, Zhu said, so the authorities are now working to “desperately have a rebound in the stock market.”

The Party’s accusation of some major media outlets—including the official news website of Fujian Province on China’s southern coast—peddling rumors can make it difficult to actually know what the rumors are.

A commentator online questioned whether the People’s Daily itself should be investigated for spreading rumors, after it published an article in April titled “4000 Is Just the Beginning of a Bull Market,” part of a deliberate regime propaganda campaign to talk up the market and coax retail investors into speculating that prices would rise.

The Shanghai Composite Index closed at 3,727 on Tuesday, nearly 300 points below People’s Daily’s implicit promise.

Communist Party media, in fact, has been promoting the market with alacrity.

On July 6, the Party’s mouthpiece People’s Daily Online, along with the state-run Xinhua, published articles with headlines like: “Capable and Confident in Maintaining a Stable Capital Market,” “Confidence in the Stable and Healthy Development of Capital Markets,” and “Trading Stock Is a Learning Process.” All were meant to shore up support as indices plummeted.

“[The] market has gone through 20 years of development … it is fully capable of getting out of this temporary crisis,” one of the articles said. “It is very dangerous to be irrational when stock is going up and it is not right to sell off irrationally when the market is in correction,” it continued.

And while news about those who have killed themselves because of downturns in the market is suppressed, stories of those who’ve become rich overnight are encouraged.

The Legal Evening News reported that 78-year-old Ms. Sun spent 20,000 yuan (about $3,215) to buy stocks in 1994, and as of June 10 they were worth 600,000 yuan (about $96,477).

“I speculate and trade stocks by following the central government policies,” she was quoted saying. “News Simulcast is a must see,” she continued, referring to the dull state-run nightly news program, which features heavy coverage of Party leaders and policies. 

Such reports were thoroughly derided by Internet users in the comments section, and when they were shared on social media.

The Party has good cause for concern. Having publicly pumped up the stock bubble to the extent it did, maintaining the prices in the market became a test of regime credibility. Even after last weekend’s panicked negotiations and announcements of monetary infusion, the markets failed to rally Monday and Tuesday.

The reason behind this is the fear of social unrest.
— Zhu Xinxin, former editor

Now, with half the companies on China’s two main stock exchanges no longer trading, all pretenses have been discarded that the markets in China are free to find their own prices.

The problem could become much more serious for the regime, apart from furious and suicidal retail investors losing their savings. This is because a large amount of the capital that brought a rapid rise to the market is borrowed money—either from companies, or brokerage accounts that provide capital, called margin loans, to investors to speculate with.

This leverage, which could consist of between 5–10 percent of the market, according to Anne Stevenson-Yang of J Capital Research, is also part of the reason the bottom fell out of share prices so suddenly: as the price of stocks drops, share positions are forcibly liquidated so brokerages do not lose their loans.

According to the People’s Daily, the Communist Party now appears to have effectively ordered brokerages not to sell any shares as long as the Shanghai Composite Index is below 4,500 points.

Follow Frank on Twitter: @HwaiDer