China’s Manic Traders Test the Communist Party’s Grip on Markets

China’s retail investors are once again testing the limits of the Communist Party’s influence over its financial markets.

The government has in the past month sought to instigate a slow bull market in equities, a typically elusive goal in a country where speculating in momentum and high-turnover trades is a national hobby.

What it got instead was the fastest rally since 2014, when a $5 trillion boom-bust was just beginning, fueled by leverage and hype. This time, the official narrative has quickly changed from encouraging investment to urging rationality, and then taking aim at some of the nation’s hottest stocks. The latest shift in tone triggered one of the biggest losses in the CSI 300 since the bubble burst five years ago.

A rising stock market will likely remain an important goal. Apart from projecting an image of strength at a time when the country is becoming increasingly aggressive on the international stage, the wealth effect could help revive consumer demand. Higher share prices boost confidence and also make it easier for indebted companies to refinance.

Friday’s early advance had faltered by the mid-day break, with the ChiNext erasing its 3% gain and the CSI 300 Index down 0.3%. While balancing greed and fear in the stock market will likely remain a challenge for Beijing, it’s unlikely the rally has reached its peak.

Here’s what officials have done so far to influence the $9 trillion market:

Friday, July 17

NORMAL ADJUSTMENT: The sharp correction in onshore stocks is merely a “normal adjustment” and investors shouldn’t be pessimistic about the market’s long-term prospects, according to a front-page commentary on the China Securities Journal. Another publication, the Securities Daily, said late Thursday that it’s now a good time for investors to add positions.

Thursday, July 16

POWERFUL CRITICISM: Kweichow Moutai Co., China’s largest onshore-listed stock, fell the most in nearly two years after the influential People’s Daily took aim at the high price of the liquor it makes. The plunge reverberated across China’s stock market, with the SSE 50 Index of the nation’s largest companies sinking the most since early February.

LEVERAGE COOLS: The value of outstanding margin debt on China’s stock exchanges fell for the first time since June 24, slipping to 1.34 trillion yuan ($190 billion).

Tuesday, July 14

STATE SALE: The ChiNext gauge of Shenzhen’s tech stars — where momentum was at a record and stronger than any of the world’s 93 equity benchmarks — plunged as much as 3.5%. Plans by government-backed funds to sell shares had been revealed the previous day.

SHADOW BANKING: China’s banking and insurance regulator demanded all financial institutions take action to rectify “irregularities” in the shadow banking sector. The notice said funds shouldn’t be channeled into complex investment products (read: structured deposits), instead of making their way into the real economy.

Friday, July 10

SELL DOWN: This was the big signal from Beijing: stocks tanked the day after exchange filings showed two government-owned funds planned to sell some of their holdings — People’s Insurance Company (Group) of China Ltd. slumped 7.4% in Shanghai. The move weighed on the index of the city’s largest stocks, which was just points away from topping its 2015 peak.

WARNING SIGNS: State-run media changed their tune. The China Economic Times warned about the dangers of a “crazy” bull market, while a Caixin report said regulators had asked mutual fund providers to cap the size of new products.

Wednesday, July 8

ILLEGAL LEVERAGE: China’s securities regulator shamed 258 illegal margin financing platforms, and warned investors to stay away from them. The move was one of the first signs Beijing was acting to contain risks after investors loaded up on leverage at the fastest pace in five years.

Monday, July 6

BULL MARKET: The CSI 300 Index surged 5.7%, extending a five-year high, after a front-page editorial in the China Securities Journal said that fostering a “healthy” bull market is now more important to China’s economy than ever.

Friday, July 3

MARGIN RELAXATION: The China Securities Finance Corp. lowered the amount of cash that brokers need to set aside to provide margin loans. This was the regulator’s first relaxation on margin trades since the 2015 bubble, according to Hao Hong of Bocom International Holdings Co.

Wednesday, July 1

RATE CUT: The PBOC cut the interest rates of some of its lending programs for the first time in a decade, which took effect July 1. The move was relatively unexpected given the central’s bank cautious approach to monetary easing in the past months.

Monday, June 29

MORE BROKERS: China may allow some of its largest commercial banks to enter into investment banking and bond and stock deal-making as soon as this year, people familiar with the matter said. The move would make the securities services industry more competitive, potentially encouraging more trading and greater participation in the market.

Friday, June 19

BENCHMARK REVAMP: Shanghai’s stock exchange laid out details for the first overhaul of its benchmark index in three decades, effective from July 22. The changes include shortening the inclusion period for newly-listed stocks and removing some chronically loss-making shares. The Shanghai Composite Index will also feature startups listed on the city’s Star board for the first time.

Friday, June 12

CHINEXT REFORM: China unveiled a series of rule changes for Shenzhen’s ChiNext board, including doubling daily price limits for all stocks, a registration-based system for IPOs and scrapping price caps altogether for stocks in their first five days of trading.

— With assistance by Sharon Chen, Ken Wang, and Fran Wang

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