Past research has shown China’s financial markets to be highly speculative and largely populated by inexperienced retail investors. Its markets also experience high price volatility and the highest trading frequency among major stock markets in the world. In contrast with policymakers in advanced market economies who often refrain from intervening in markets to ensure more efficient pricing and capital allocation, China’s government relies heavily on interventions to stabilize even short-term market fluctuations. By analyzing China’s 2015 stock market crash, researchers explore the potential tradeoffs of China’s large-scale government interventions in its financial markets.  

The data. Researchers sourced data on quarterly-reported government holding records from Wind, a leading Chinese financial data vendor, and the China Stock Market and Accounting Research database. Interventionist stock purchases by state-owned financial institutions began in July 2015 following the stock market crash, allowing researchers to measure the effects of the intervention on stock price fluctuations and price informativeness before and after the intervention and before and after subsequent disclosure of the intervention, between July 2013 and July 2017.  

Stock market crash catalyzes large-scale government intervention. China’s stock markets experienced a month-long crash that wiped out roughly 40% of total market capitalization in mid-2015. To stop the drop in stock prices, China’s government adopted various measures, including IPO suspensions and trading restrictions on index futures. The most unusual intervention, however, was the large-scale direct stock purchase through four state-owned financial institutions known as the “National Team” (NT). By the end of the third quarter of 2015, the NT had acquired shares representing 4.3% of the total market value of all listed companies in that quarter. In contrast to government interventions in other economies that focus solely on major index stocks, the NT portfolio included stocks of all size and profitability groups across almost all industries.  

National Team portfolio, 2015–2018

Government intervention stabilizes stock prices. Researchers measured how the government intervention affected stock price volatility, or the degree of a stock price’s fluctuation within a single day and across days. The NT began purchasing stocks in July 2015 and publicly disclosed its portfolio every quarter three months later, beginning in October 2015. In the initial three months of the NT’s intervention, when its portfolio was not yet publicly disclosed, researchers found that the NT’s trading actions were associated with a 5.65% decrease in stock price volatility relative to the sample average. Once details of the NT’s stock purchases were made public through disclosure of its portfolio three months later, price volatility declined a further 2.92%. From 2015 to 2017, stock price volatility among all intervened stocks decreased by an average of 3.45%. These results suggest the intervention (and its disclosure) had the effect of stabilizing markets by reducing panic selling, which can cause prices to drop sharply. 

Government intervention reduces stock price informativeness, efficiency. By comparing the price fluctuations of stocks held by the NT with similar stocks not purchased by the NT, researchers found that the NT’s holding in a stock is negatively correlated with stock price informativeness ­— that is, a stock price’s reliability as an indicator of the company’s true value. Specifically, an average stock with a 3.08% NT holding exhibited a 4.6% lower price informativeness compared to the sample average. The NT’s quarterly portfolio disclosure decreased price informativeness from anywhere between 5.84% and 28.5%. This result is consistent with the view that government intervention induced stock trading based on government holdings rather than underlying firm value, leading to considerable mispricing.   

In another effort to gauge the effect of the intervention on price informativeness, researchers assessed how efficiently the market reacted to quarterly earnings reports of firms after the NT intervention. The researchers found that intervened stocks were more mispriced than non- intervened stocks following any earnings surprises in quarterly earnings reports. Specifically, they show that following earnings disclosures, a portfolio with NT intervened stocks yielded a 20.6% annualized return after 20 days compared to 13.8% return for a similar portfolio with no NT intervened stocks. This finding suggests that the NT-intervened stocks were less responsive to earnings news because investors acted on intervention information rather than on fundamental information about firms, yielding abnormal trading profit.   

Information disclosure reduced private information production, information asymmetry. Researchers sought to identify some of the mechanics behind lower price informativeness following the NT disclosure. Researchers use both analyst coverage and the number of company visitors as a proxy for the amount of information available to traders about NT-intervened firms. They found that NT intervention disclosure is associated with lower analyst coverage of the intervened stocks and, among firms in the NT portfolio, a significant decrease in the overall number of company visitors and asset manager visitors. The researchers also found that “information asymmetry” about stocks had shrunk substantially after the NT disclosure. Both findings suggest reduced incentive among traders for learning about fundamentals of intervened stocks and thus less information production by analysts and investors about these stocks, which led to less informative prices and more mispricing. 

Tradeoffs involved with market interventions may suit China’s policy agenda. Taken together, the findings suggest that there is a significant tradeoff between stability and efficiency in China’s financial markets. While intervening can be costly in terms of lost efficiency in capital allocation, this arrangement may nonetheless suit China’s government’s agenda which may prioritize stability over other policy objectives, like market efficiency.