The Pause that Refreshes?

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Finally, maybe — some good news:

China’s stock markets posted their biggest one-day gain in over six years Thursday, as moves by the authorities to stop the panic selling of recent days began to bite.

The Shanghai composite index rebounded 5.8%, while the Shenzhen Composite, home to many of the country’s technology stocks, gained 3.8% in a sharp reversal of recent trading, while the Hong Kong Hang Seng index also regained 3.7%. But the mainland markets are still nearly 30% off their June peaks, after a rout that has wiped billions off the value of small investors’ holdings.

That’s huge, but needs to be seen in the context provided yesterday by Daniel Drezner:

The pre-panic run-up had all the makings of irrational exuberance. Furthermore, despite the large decline in equity prices, Chinese stocks are still massively overvalued compared to where they were last fall. So unless the “Xi put” is way larger than the “Greenspan put” was back in the day, Chinese stocks still have a long way to fall.

This doesn’t necessarily mean that financial contagion will infect China’s real economy. Chinese equity markets are pretty thin and small as a percentage of GDP compared to the developed world. Less than 20 percent of household assets were in the stock market. Financially, it would be difficult to argue that this is China’s Lehman moment.

So why would Beijing risk its own central bank reserves to protect illusory gains in a narrowly-held equities market from a much-needed correction which is unlikely to effect the economy as a whole?

My guess is the answer can be found in who holds those equities.