Politics are a rising source of economic risks worldwide. One doesn't have to venture into investments in, say, Turkey—with a chaotic civil war happening at its borders while an Islamist party attempts (unsuccessfully!) to consolidate unchallengeable Presidential power—to incur political risks. One doesn't need to experience invasion, or sanctions, or nationalization in Russia to be subject to political risks. One doesn't need to endure political scandal and paralysis in Brazil to be subject to political risks. They are everywhere, and rising, to judge from the sobering signals we are receiving. Recall that it was not very long ago that polarization in US politics nearly caused a default on US government obligations. In our view, the reasons that politics matter more than they used to just a decade or so ago is two-fold: governments have inexorably come to account for a larger and larger share of most economies, and the activist intervention in the economy via unorthodox monetary policy has risen dramatically since the financial crisis.
Despite the alarmist headlines, the bursting of the A-share bubble is probably a healthy development for China's equity markets. Unregulated lending for the purpose of stock speculation is an activity that should be kept in check. Instead, what strikes us as ill-advised are the recent heavy-handed and even clumsy actions by the government to slow the intense selling, such as banning major shareholders with stakes exceeding 5% from selling for a six-month period. Such illiberal actions run counter to President Xi Jinping's stated goal of allowing market forces to play the decisive role in allocating resources in the economy. Of course, the Chinese government is not alone in behaving inconsistently. Authorities throughout the developed, ostensibly capitalist, world have been engaging in market manipulation on a massive scale in recent years: think quantitative easing in the US, Japan, and Europe. The hope here is that the Chinese government's interference in the free operation of the domestic stock market proves transitory.
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