Unlock stock picks and a broker-level newsfeed that powers Wall Street.
It's amateur hour in China

This is the next superpower?

You’ve got to be kidding.

Anybody expecting China to dominate the world must be wondering how the Keystone Kops managed to take over the Politburo in Beijing. China has embarked on a long odyssey to prove that capitalism can work within the confines of a communist government. There have been many impressive successes. But the failures—including those we’ve seen on display this summer—reveal that China is nowhere near the global powerhouse it imagines itself to be or some western declinists fear it will become.

The follies in China’s financial markets during the past two months have mainly been driven by the communist government’s failed effort to manipulate stock prices as it sees fit. Beginning in 2014, the central government began urging people to buy stocks, as a way to divert money from real estate and deflate a dangerous property bubble. People obeyed, and it seemed to work for a while. By June, the Shanghai stock market (000001.SS) had soared by 150% since last summer.

Then something happened that’s normal in capitalism: Investors began to think stocks were close to a peak, so they sold to lock in profits. Not what the government was expecting. The government tried to stem the selloff by enacting stimulus measures, instituting new rules and even preventing some institutional investors from selling. Authoritarianism displaced capitalism. Yet even then, stocks plunged. Since the June peak, the Shanghai market is down by nearly 40%, and it could have further to fall.

China’s government has now reverted to the ultimate absurdity: Blaming critics of the markets’ performance for the whole fiasco. Authorities have rounded up and punished nearly 200 people whose acts of sedition include suggesting Chinese stocks might go down. They include several bloggers and stock market officials plus at least one journalist. That’s like indicting a weatherman who accurately predicts a storm that’s coming. As if saying the sun will shine will make the sun shine.

Here in the United States, people publish opinions all the time about what’s right or wrong with the stock market. They make predictions of all kinds -- and are often wrong. Instead of getting a prison sentence, they get to deliver their opinions on cable news shows.

Western markets also tolerate short sellers and others who bet against stocks because it serves as a check on the system: When there’s money to be made by stocks going down, it forces better diligence among those betting stocks will go up. Abuses? Sure. But unleashing market forces in every direction—not just the one you want prices to go in—generates confidence that prices will gravitate toward an equilibrium based on reality.