China Center Quick Note: Beijing’s Pyrrhic Victory Over the Equity Rout

Turbulence in China’s equity market looks to be here to stay, at least for the time being, with the Shanghai Composite off a whopping -8.5 percent on Monday, July 27. This contraction not only represents the largest drop since February 2007, but it is even bigger than the -7.4 percent drop that occurred on June 26, triggering the initial spate of heavy-handed regulatory intervention. While the ultimate outcome of this episode remains to be seen, we draw some interim conclusions regarding the outlook for China’s financial markets, the real economy, the MNC business environment, and the broader reform agenda.

Overall, the credibility of both China’s markets and regulators has been badly damaged. And while the economy is by no means going into free fall, sentiment among both consumers and producers is clearly souring. Finally, recent market movement suggests that more regulatory intervention is imminent and that government support will necessarily be long-lasting. As we explain in this Quick Note:

“For at least the time being, China’s equity market is no longer a market.”