Stock market update: Beijing vs. Irrational investors. No one seems to be winning.

China's stock market volatility has ramped up again.  The Shanghai Composite fell 8.5% on Monday.  Worries of a market panic have resumed.  As I have mentioned in previous blog posts, applying rational valuations to China's share prices is a futile endeavor in the current environment.  The market has been disconnected from the real economy for some time.  Valuations swing wildly.  Firms can halt trading in their own shares if they don't like the direction of price moves.  Beijing has stepped in, but in doing so has potentially caused more uncertainty. 

See my blog postings from the last few months for more details: China's stock market volatility is crazy, and who knows where we go from here., and China's stock market surge by the numbers., and China stock market returns and the real economy. Just how disconnected?  

The market at this point is a tug of war between Beijing policymakers trying to stabilize markets, and behavior-prone investors driving the market to unreasonable levels of volatility.

China's leadership has a bad track record of controlling markets.  The debt markets, the property markets, and natural resource pricing (water in particular) have proved difficult to control.  Beijing's attempts to control markets have often contributed to inefficiencies and moral hazards. The PBOC and Beijing policymakers, having already entered the business of bailing out shareholders with early July interventions, are now stuck potentially piling resources into the stock market stabilization (see my blog post China stock market interventions are a setback to reforms. for more details).  The battle between China's policymakers and behavior-driven investors will probably end poorly.

On a good note, margin debt has fallen nearly $100 billion since the peak.  June economic data appeared to be unscathed from the market drop.  Valuations do not seem unreasonable currently.  But, volatility does not seem to be going away.

Here is a graphical timeline of stock market events over the last year.