The Shanghai composite stock index has lost more than a quarter of its value since early June, after more than doubled in the preceding year. Government intervention meant to prop up prices has so far failed to stabilize stocks or restore public confidence. In the first part of a three-part series, Paul Haenle and Carnegie’s Yukon Huang discuss the causes of the crash, its political and economic consequences, and how China’s stock market differs from those of other countries.

Huang explained that the growth in China’s stock market over the past year was encouraged by government policies rather than underlying economic conditions. Regulators and leaders who might ordinarily have urged caution to manage risk instead directed more investment into the equity market so as to internationalize the renminbi and to help manage China’s debt problem. Huang explained that although these objectives are sensible, their implementation was not carefully considered. He argued that the stock market crash is unlikely to prompt wider economic contagion, because only seven percent of Chinese households own stock. Still, Huang argued that the confidence and credibility of the top Chinese leadership has been undermined.

Yukon Huang

Yukon Huang is a senior associate in the Carnegie Asia Program. His research focuses on China’s economic development and its impact on Asia and the global economy.

Paul Haenle

Paul Haenle is the director of the Carnegie–Tsinghua Center for Global Policy. Prior to joining Carnegie, he served from June 2007 to June 2009 as the director for China, Taiwan, and Mongolian Affairs on the National Security Council staffs of former president George W. Bush and President Barack Obama.