Did China’s regulators exacerbate its recent stock market bubble?

The plunge of China’s stock market that has taken place since June 2015 has received a lot of attention.  All the commentary says not only that the Chinese authorities have taken a variety of artificial measures to try to boost the market on the way down but also that they did the same during the huge run-up in stock prices between mid-2014 and mid-2015, when the Shanghai stock exchange composite index more than doubled.  The finger-wagging implications are that the Chinese authorities, particularly the stock market regulator, have not learned how to let the market operate and that they had only themselves to blame for the bubble in the first place.

There is unquestionably a lot of truth to this overall story.  But am I the only one to notice that the Chinese authorities repeatedly tightened margin requirements during the bubble, in January and April 2015?   And that in fact the event which apparently in the end “pricked” the bubble was the June 12 announcement by the China Securities Regulatory Commission of plans to limit the amount brokerages can lend for stock trading?

It seems pretty clear that the extraordinary run-up in stock market prices from June 2014 to June 2015 was indeed fueled  by an excessive increase in margin borrowing.  Reasons for the increase in margin borrowing include its original legalization in 2010-11; easing of monetary policy by the People’s Bank of China since November 2014 (in response to slowing growth and inflation); and the eagerness of an increasing number of Chinese  to take advantage of the ability to buy stocks on credit.   Nevertheless, it appears that the stock market regulator responded by leaning in the opposite direction.

This is the sort of counter-cyclical macroprudential regulatory policy that we economists often call for, but less often see in practice.  (I survey some of the research  in the 2015#2 issue of theNBER Reporter.   A recent study by Federico, Végh, and Vuletin, for example, found that China and a majority of other developing countries also adjust bank reserve requirements counter-cyclically.)

Someone could criticize the Chinese increases in margin requirements by saying either, on the one hand, that their effects on the stock market did not last long (January and April, 2015) or, on the other hand, that they caused the recent crash (June).  But at least the moves were in the right direction, which is not a trivial point..