In Case You Thought The Chinese Know What They're Doing -- Part III

Spending hundreds of billions of dollars of state funds to support the stock market.  Spending more hundreds of billions of state funds to make new loans to failed businesses so that "zombie" factories won't close and keep operating with few to no customers.  Using state banks to allocate credit to businesses selected by the political leaders.  All these have been the economic policies adopted by the leaders of China in the face of the recent stock market downturn and revelations of significant overcapacity in major business sectors.  Could the economic policies followed by China possibly get any worse?

Yes!   For about the past two weeks there have been rumblings of the beginnings of criminal investigations against market participants for allegedly being the cause of the downturn.  This morning, the Financial Times has the latest in an article titled "China blame game spooks investors."  Seems like the economic genius powers that be in China, having never heard of the phenomenon of market bubbles, have decided that the downturn must have been caused by some combination of "malpractice, manipulation, and 'rumour mongering'."  They are in the process of rounding up the usual suspects:

The authorities have arrested, or investigated, several employees of brokerages, listed companies, and even the market regulator itself as they seek to tackle malpractice, manipulation, and "rumour-mongering". . . .  [O]fficial focus has shifted towards probing and punishing individuals and institutions the authorities believe took advantage of the state bailout to make profits, or who obstructed the government's attempts to shore up the market.

The FT reports that a prominent hedge fund head, Li Yifei (a woman) was "summoned" several days ago for meetings with the authorities, and hasn't been heard from since.  Then there was the reporter from Caijing magazine who reported (correctly) that the government was planning to scale back its massive stock market purchases.  He found himself forced to make a public confession on national television that his report had caused "panic and disorder" in the market.  Do they really believe that these kinds of witch hunts are somehow going to restore confidence in the markets?

Of course, it's exactly the opposite.  What they really should be trying to do is set up the conditions to encourage major outside investors to come in and start buying as soon as the market gets to appropriate valuations.  Instead, what they are doing is virtually certain to scare people off.  Investors have of course been spooked, and rightly so:

China has spent years courting foreign investors, in the hope that more institutional money would help anchor a retail-driven market long prone to bubbles and busts.  But many global funds -- even those long accustomed to China's erratic, opaque stock markets -- have begun pulling back.

It's all in the great tradition of economic ignoramuses who blame all economic problems on some kind of malign financial players, the "hoarders and speculators," the "greedy bankers," the Jews, whatever.  Like Chavez and Maduro in Venezuela, constantly announcing yet another crackdown against the hoarders and speculators, as if their own wild overspending, exchange controls, crony capitalism and currency printing had nothing at all to do with the economic problems.  Or Elizabeth Warren, who thinks that the U.S. economic downturn of 2008/9 was all the fault of "greedy bankers."