As all of China watches in horror at the country's stock market plunges day after day there's only one idea keeping people invested.

They believe the government will ultimately rescue the market when the time comes.

"China has been through the planned economy model for decades. This is especially ingrained in the generation of my parents, who make up the bulk of individual investors," South China Morning Post managing editor George Chen wrote this week.

"Just as everything once belonged to the government, many of these people believe the stock market should also belong to the government. So it's the job of the government — in other words, the Communist Party — to rescue the market."

Over the last year the Shanghai Composite Index has more than doubled. Regular Chinese people from all walks of life took out loans at interest rates of up to 22% to lever up their investments in it as the rest of the economy slowed. It was a bonanza.

Until June 12th, when the index started to fall ... and kept falling. Now it's down almost 20%, and since the fundamentals of the economy and Chinese corporates haven't changed, no one knows when the selling will stop.

Earlier this week, a Chinese state auditor found that over a dozen state-owned companies falsified their records to seem healthier. This isn't the kind of news the market needs right now.

A reckoning?

The government responded to this turmoil (and weak economic data out last week) by cutting deposit and lending rates as well as reducing the required reserve ratio for some banks. The thing is, all that has been done before. This is the fourth rate cut since November. 

On Wednesday the Shanghai Composite fell over 5%. On the same day, the National Bureau of Statistics released its manufacturing purchasing-managers’ index, which came in at 50.2 in June. That's unchanged from May and missed expectations of a 50.4 reading.

"The latest developments in China ... inevitably invite the question whether Central Banks are coming to the end of the road," Macquarie analysts wrote in a recent note. "Given the limited impact of their policies on real economies with stimulus largely being confined within walls of financial assets, has the time of reckoning finally arrived?"

Blame the barbarians

If the reckoning has come, it's unclear whom Chinese people will blame.

China's Financial Futures Exchange took its sweet time squashing rumors that Goldman Sachs and other foreign investors were shorting the market and causing its dramatic dive on Wednesday. 

"These institutions' risk-hedging using index futures conform to relevant rules, and there's no such thing as massive shorting," it said in its official microblog.

That hasn't convinced China's investors though.

From the South China Morning Post:

In a cartoon published on Tuesday by, a state-owned digital media outlet that aims to engage with a young audience, an old Chinese woman is depicted as saying she wants to thank the government for helping to rescue the market. She also blames “foreign ghosts” for willing it to crash.

The Chinese Communist Party has one nightmare, and that's civil unrest. It encouraged Chinese people to enter the market, and it's more than happy to allow foreigners to take the blame if Chinese investors get burned.

The crash that can't, but might

Last month, the official in charge of IPOs and share offerings in the Chinese stock markets was carted off to jail for corruption. That's the government's way of saying 'hey, we're doing something.'

But that something probably isn't the backstop investors are looking for. The government has (so far) made it clear that there will be no 2009-style bailout for the economy — for flailing property companies, local government financing vehicles, for banks holding bad corporate debt, for mismanaged state-owned enterprises.

This, they say, is what the "new normal" looks like. 

Of course, a crashing stock market was never factored into that picture. In that way, as Chen pointed out on Twitter, the market is holding the government hostage. A stock market crash would cause civil unrest. A stock market crash would trickle into the real economy.

A stock market crash can't happen.

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