The recent turmoil on China’s stock markets and the authorities’ attempts to intervene raise questions about the continued appetite for allowing market forces to prevail

China’s stock market crash in the recent weeks shows the dangers of investing in a market that is heavily manipulated by the government, lacks transparency and whose fundamentals are unknown.

The government machinery and media worked tirelessly to promote bullish behaviour by openly encouraging retail investors to buy more shares. And people did invest as if the bull run would never end. The government campaign resulted in 40m new stock accounts between June 2014 and June 2015 and the Shanghai Composite Index went up by 150% in the same period.

When the market crashed, the government tried to manipulate the market again by pumping more than $200bn into stocks to stop the rout, only to see the futility of its efforts. The government is now left red faced.

China’s leaders have viewed the rising stock market, erroneously, as a sign of the country’s economic might and a necessary manifestation of their growing global influence. A falling stock market therefore is perceived a sign of political weakness.

This explains why the government panicked over the crash and started an extraordinary rescue operation. Short selling was capped. Pension funds were ordered to buy more stocks. Initial public offerings were suspended to limit the supply of shares and the central bank created funds for brokers to buy shares.

Companies’ major shareholders were barred from selling their stocks for six month and companies were ordered to buy their own shares. Nothing worked.

Stock market crash highlights a lack of freedom and transparency

There are some intriguing facts: even though the stock market lost almost one third of its value over a short period weeks, it was still 80 per cent higher than a year earlier; foreign investors do not account for a significant proportion of stock trading; state-owned companies dominate the two main stock exchanges – Shanghai Stock Exchange and the Shenzhen Stock Exchange – but offer only a tiny part of their shares for trading to maintain their control over the company.

Governments everywhere, particularly in developed countries, try to prop up stock markets by intervening when they have to. But in developed countries the stock markets account for more than 100 per cent of GDP and the stakes are high as compared with China where the stock market investments represent only one-third of the GDP.

In summary, stock markets do not play a significant role in China’s economy. It’s actually the politicians who believe that booming stock markets reflect the government’s success.