The Chinese stock market enjoyed a meteoric rise starting in the summer of 2014. The benchmark Shanghai Composite Index peaked on June 12, having risen 154 percent over the previous year.
As it so often does, the fall came faster than the ascent.
In just two weeks, the Chinese index tumbled nearly 19 percent, and Chinese officials took steps to avert even further declines.
First, on June 27, the central bank cut interest rates in an attempt to soothe investors’ nerves. Two days later, officials allowed government pension funds to invest in the stock market for the first time, permitting the funds to put up to 30 percent of their holdings in equities.
Over the course of the next month, the government would implement a host of other measures to shore up the market, including buying stocks, lending money to large brokers sothey could buy stocks, encouraging state-owned enterprises to buy back shares, banning short selling and initial public offerings, and prohibiting large shareholders and senior management from selling their shares.
Such intervention is hardly unprecedented – governments have been stepping in to calm their markets for at least 300 years. Here are some of the most notable interventions in history.
On September 19, 2008, the U.S. Securities and Exchange Commission said it would temporarily prevent investors from shorting the stocks of 799 financial institutions. Essentially, short sellers were betting that the prices of banks and other financial firms would fall as a result of the global financial crisis.
1720: The Bubble Act
When the South Sea Company was formed in 1711, the British government granted the firm exclusive access to trade with Spanish colonies in North America, assuming the country would gain control over the territories at the conclusion of the War of Spanish Succession. But when the conflict ended, Spain retained control.
The South Sea Company had one more avenue available for financial success however. The company worked out an arrangement to pay the British government to convert the debt Britain incurred to finance the war into South Sea shares, with the understanding that it could issue new shares to pay for the debt. The company would then use the interest it earned on the government debt to pay out dividends to its equity investors.
In 1720, management drummed up enthusiasm for the company’s shares by spreading false rumors of its fantastic success, according to digital archives from the Kress Collection at Harvard Business School. The firm offered a subscription offering in which investors could put 20 percent down to buy £300 in shares and pay the rest later, according to the New York Federal Reserve’s Liberty Street Economics blog. When the £2 million program was successful, they launched another one. And then a third.
As the South Sea Company’s stock soared, new companies (some with dubious prospects) offered shares to an eager public for the first time. Speculation built to a fever pitch, and the British government passed the Bubble Act, which required companies issuing stock for the first time to obtain a royal charter. This essentially ended new public offerings, a move somewhat similar to the Chinese government’s move to suspend IPOs on July 4 of this year.
1812: A Wartime Ban On Short-Selling
Wall Street’s first panic took place in 1792, and trading activity slumped in the years that followed, according to the book “Wall Street,” by Walter Werner and Steven T. Smith. Not a single company went public for six years after the crash.
But market activity picked up again around the turn of the century, when a number of new businesses got charters from the state of New York, according to the book. In 1812, the year of the eponymous war, four new banks went public and the market simply couldn’t digest all the new stock, according to “Wall Street.”
Prices dropped, and “panic selling” of bank shares ensued, according to “The Most Dangerous Trade,” a book about short selling by journalist Richard Teitelbaum. New York State banned short selling until 1857.
1929: Brokers Band Together To Buy Stocks On Black Thursday
The government isn’t behind all stock market interventions. On Thursday, October 24, 1929, as U.S. stock markets were going into freefall, prominent bankers joined forces to buy big chunks of shares, according to the book “The New York Stock Exchange: The First 200 Years.”
“In a famous scene that day, Richard Whitney, an influential NYSE member who was acting on the bankers’ behalf, strode up to the trading post for U.S. Steel and placed a bid for 10,000 shares at $205 each, the previous sale price,” the book says. “He then continued around the trading floor, placing similar orders for nearly 20 other stocks.”
Chinese brokers attempted to rescue their domestic stock market this summer, too. On July 4, 21 large brokers said they would spend 120 billion yuan ($18.8 billion) buying stocks.
Several days later, the China Securities Finance Corp., a state-owned enterprise that lends to Chinese investment firms, set up a 260 billion yuan ($40.7 billion) credit line to fund further purchases by the same 21 brokerages.
See the rest of the story at Business Insider