HONG KONG, June 5 — The Chinese government is learning the dangers of intervening in stock markets, as policy shifts by the government and even speculation of policy shifts have led to sharp swings in share prices on the Shanghai and Shenzhen stock markets over the last week.
Chinese shares plunged 7 percent on Tuesday morning, continuing a steep descent that began last Wednesday when the government tripled taxes on share transactions to halt three months of steep stock market gains.
But by early Tuesday afternoon, the panic selling abruptly gave way to frenzied buying as rumors circulated that the government might defer the introduction of a capital gains tax for up to three years. State-controlled newspapers also reported that the government had authorized four large funds to raise money for the purchase of stocks.
The Shanghai A Share market ended the day Tuesday with a gain of 2.58 percent, while the Shenzhen A Share market gained 2.34 percent. Investors outside China have reacted fairly little to the recent ups and downs of the Chinese markets.
[On Wednesday, the Chinese markets ended the trading session with more modest gains. The Shanghai index gained 0.25 percent, while shares in Shenzhen were up 1.95 percent.]
The remarkable volatility in the markets underlined again the extent to which stock market investors continue to look to the government for cues on when to buy and when to sell. Many experts have warned that this dependence on the government could bring the wrath of investors on Beijing officials if the market was to suffer a deep and prolonged drop.
But the Chinese government has been wary of letting strictly market forces determine the path of stock prices. “It’s a government that likes to be in control,” said Carl B. Weinberg, an economist at High Frequency Economics, a consulting firm in Valhalla, N.Y.
The turnaround in the Chinese stock market on Tuesday afternoon seemed to occur in the nick of time for other Asian stock markets. After largely ignoring the Chinese stock market’s troubles through Monday, stock markets began to dip on Tuesday morning in Hong Kong, South Korea, Thailand, Malaysia, Singapore, Indonesia and India.
The losses were modest in each case, however, with a broad measure of Thailand’s market showing the heaviest loss, down 1 percent in early afternoon. In Japan, the Nikkei index bucked the trend and eked out a gain of 0.31 percent by early afternoon. [Asian markets were stable in trading on Wednesday.]
Chinese stocks began to turn around with the rumor of government intervention and as investors paid more attention to reports in state-controlled newspapers in the morning that the government had authorized the creation of four funds that will be allowed to raise up to $1.3 billion each from investors for the purchase of stocks.
Newspapers also published articles suggesting that investors focus on potential long-term gains.
By the end of the day, with the Chinese market rising again, most Asian markets were posting gains. Share prices climbed 0.54 percent for the day in Hong Kong, while the Nikkei 225 index rose 0.45 percent in Tokyo.
The current calm contrasts with the steep declines in markets around the world when Chinese shares suddenly fell 9 percent on Feb. 27.
Jing Ulrich, the chairwoman of China equities at J. P. Morgan, said the difference was that the Japanese yen was strengthening in late February, so investors were already looking for holdings around the world to sell so that they could repay money they had borrowed in yen. But the yen has been fairly weak for the last week, so investors have been less eager to sell in response to the Chinese market’s difficulties, Ms. Ulrich said.
The Chinese government is also likely to prevent stocks from falling too far because that could risk antagonizing many citizens who are already upset by the steep rise in the price of pork and other meats this year, she added.
Most economists and market analysts continue to maintain that a drop in China’s stock market is unlikely to affect the powerful Chinese economy. If the Chinese economy stays strong and continues buying a lot of imports from its Asian neighbors, then the neighbors’ economies may also prove resilient.
Qu Hongbin, an economist at HSBC, wrote in a research note on Tuesday that China’s economic growth depended mainly on fixed asset investments and exports. Chinese companies depended on the stock market for only 6 percent of the outside money they raised to pay for their investments. Many Chinese companies are so profitable that they barely need outside financing and can make investments with the cash they generate from current operations.
“Any potential crash in the stock market is unlikely to cause a meaningful reduction in the funds available for the corporate sector’s investment and production,” he wrote.
The sharp rise in the Chinese stock market this spring also seems to have done little to stimulate consumer spending by families with gains on their share holdings, so a reversal of the market should not be much of a drag on consumer spending, Mr. Qu added.
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