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Chinese Government’s Rescue Measures Risk the Financial System

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Published on : Jul 07, 2015

The Chinese government has introduced a new series of measures in the last couple of days to stop the stock market from crashing. The measures are the government’s way of assuring people about its efforts to keep the stock market afloat. The introduction of the new measures helped the market a bit with the Shanghai Composite closing up 2.4% on Tuesday. However, analysts have cautioned that the new measures are risking the entire financial system of the nation. 

Among the measures, the security regulator in the country has entered into an agreement with the People’s Bank of China to provide liquidity support. Also, to stabilize the market, an initial amount of 120 billion yuan would be raised through 21 brokerages. The government has also assured that the Shanghai Composite would hit 4,500 mark. Analysts are comparing the government’s rescue efforts to the U.S. government’s bank bailout package in 2008. However, there is a big difference as the US government did not save a stock exchange, rather a number of operating companies. The Chinese stock market created by the government has helped the state-owned companies and the Communist Party through the replacement of government-guaranteed debt with equity. With the present measures asking for liquidity through the support of PBOC, savings of millions of households are at stake. 

When the Chinese government decided to support the stock market, billions of borrowed money were invested into the equities. If that money is lost and the debts are not repaid, the whole financial system in China will be at risk. Analysts point out that the banks would face the maximum risk with their exposure to loans. With the government’s too much involvement in the stock market and in the current preventive measures, industry experts are wary that the whole financial system in the country might collapse.