THE HAND OF GOVERNMENT AND THE FORCE OF THE MARKET: AN EMPIRICAL REVIEW OF FIVE MAJOR RESCUES IN CHINA'S A-SHARE MARKET
Keywords:
A-share market, Government intervention, Market rescue, Moral hazard, Market quality, Financial stability, Policy designAbstract
China's A-share market shows a pattern of sharp swings and repeated government rescues. This paper reviews five major rescue episodes in 1994, 2008, 2015, 2018, and 2024. It combines the historical record with evidence from recent empirical studies. The review finds a clear and consistent pattern. Rescue policies stop panic and block risk contagion in the short run. Direct intervention, however, tends to harm market quality over longer horizons. Rescued stocks often show higher volatility, weaker liquidity, and lower price efficiency. Frequent rescues also feed moral hazard, because investors come to expect a policy floor under prices. The paper then compares the costs and benefits of different rescue tools. Indirect tools such as liquidity support and expectation guidance carry smaller side effects than direct stock purchases. Based on these lessons, the paper proposes a rule-based stabilization framework, a tool hierarchy that treats direct purchases as a last resort, stronger policy communication, a clear exit plan, and deeper reform of basic market institutions.References
[1] Allen F, Qian J, Qian M. Law, finance, and economic growth in China. J. Financial Econ., 2005, 77(1): 57-116.
[2] Carpenter J N, Lu F, Whitelaw R F. The real value of China's stock market. J. Financial Econ., 2021, 139(3): 679-696.
[3] Pástor L, Veronesi P. Uncertainty about government policy and stock prices. J. Finance, 2012, 67(4): 1219-1264.
[4] Brunnermeier M K, Sockin M, Xiong W. China's model of managing the financial system. Rev. Econ. Stud., 2022, 89(6): 3115-3153.
[5] Cong L W, Gao H, Ponticelli J, et al. Credit allocation under economic stimulus: Evidence from China. Rev. Financial Stud., 2019, 32(9): 3412-3460.
[6] Bian J, He Z, Shue K, et al. Leverage-induced fire sales and stock market crashes. Nat. Bur. Econ. Res., Cambridge, MA, Working Paper, 2018: 25040.
[7] Huang Y, Miao J, Wang P. Saving China's stock market. IMF Econ. Rev., 2019, 67(2): 349-394.
[8] Xiong W, Yu J. The Chinese warrants bubble. Amer. Econ. Rev., 2011, 101(6): 2723-2753.
[9] Mei J, Scheinkman J A, Xiong W. Speculative trading and stock prices: Evidence from Chinese A-B share premia. Ann. Econ. Finance, 2009, 10(2): 225-255.
[10] Bailey W, Cai J, Cheung Y L. Stock returns, order imbalances, and commonality: Evidence on individual, institutional, and proxy investors in China. J. Banking Finance, 2009, 33(1): 9-19.
[11] Morck R, Yeung B, Yu W. The information content of stock markets: Why do emerging markets have synchronous stock price movements?. J. Financial Econ., 2000, 58(1-2): 215-260.
[12] Baker S R, Bloom N, DavisS J. Measuring economic policy uncertainty. Quart. J. Econ., 2016, 131(4): 1593-1636.
[13] Allen F, Qian J, Shan C, et al. Dissecting the long-term performance of the Chinese stock market. J. Finance, 2024, 79(2): 993-1054.
[14] Amstad M, Sun G, Xiong W. Eds., The Handbook of China's Financial System. Princeton, NJ, USA: Princeton Univ. Press, 2020.
[15] Deng Y, Morck R, Wu J, et al. China's pseudo-monetary policy. Rev. Finance, 2015, 19(1): 55-93.
[16] Song Z, Xiong W. Risks in China's financial system. Annu. Rev. Financial Econ., 2018, 10: 261-286.
[17] Brunnermeier M K, Pedersen L H. Market liquidity and funding liquidity. Rev. Financial Stud., 2009, 22(6): 2201-2238.
[18] Ba S, Shen C, Zhu H, et al. An analysis of the causes of the 2015 abnormal volatility in China's stock market. Comparative Studies of Financial Regulation, Beijing, China, 2016(2): 49-56.
[19] Chen H, Petukhov A, Wang J, et al. The dark side of circuit breakers. J. Finance, 2024, 79(2): 1405-1455.
[20] Veronesi P, Zingales L. Paulson's gift. J. Financial Econ., 2010, 97(3): 339-368.
[21] Fama E F. Efficient capital markets: A review of theory and empirical work. J. Finance, 1970, 25(2): 383-417.
[22] Shleifer A, Vishny R W. The limits of arbitrage. J. Finance, 1997, 52(1): 35-55.