China is looking to rescue its stock market. But is that a good idea?
When a government is worried that its stock market has fallen too far, sometimes it tries to buy stocks in an attempt to turn the market around. China is looking to unleash about $278 billion to that effect shortly.
Why it matters: Economists generally hate this move, saying it introduces inefficiencies to markets. But policymakers are generally more open to it.
Flashback: Vox's Tim Lee gave a good example of the textbook case against governments buying stocks in 2015, after China started propping up the stock market. That intervention turns out to have been underwhelming.
- A previous intervention, in Hong Kong in 1998, however, was much more successful.
- A Japanese program to buy ETFs in 2010 also worked, if not quite as well.
Be smart: Economists nearly always like options — the mere option to do something, even if you end up not doing it, is seen as having some positive value.
- That explains why Janet Yellen supported giving the Fed the option to buy stocks in 2020, even though she was clear she didn't think the Fed should buy stocks at the time.
The bottom line: In a world where the level stock market can directly drive public confidence, it's easy to see why policymakers might be attracted to the idea of bidding up their home markets.