STEVE INSKEEP, HOST:
Let's follow up now on a detail of China's big stock market slide. Our colleague Frank Langfitt told us this week of a Chinese man who put his money in the market and kept it in the Shanghai market because the Communist Party newspapers told him it was a good idea. Turns out quite a lot of the action in the Shanghai market has been driven like this. The Beijing government encouraged risky investments. NPR's Jim Zarroli reports.
JIM ZARROLI, BYLINE: On the surface, the Chinese stock market looks and sounds something like the markets in New York or London or Tokyo, but it differs in some big ways. For one thing, China's three stock exchanges are small. They list only about 2000 companies, and most of these are politically connected. Scott Kennedy directs the China business program at the Center for Strategic and International Studies.
SCOTT KENNEDY: This is simply a way for companies to raise money, and oftentimes, companies that are listed are listed because they're state-owned or they're privileged private companies.
ZARROLI: Kennedy says the Beijing government also bars most foreigners from investing in the stock market, except for a small group of designated institutional investors. That's because the government likes to keep the market stable, and they can't do that if too many foreigners are buying and selling big blocks of shares. So about 80 percent of stock market investors are individual Chinese, and they buy a particular stock because they think the company is favored by the government.
KENNEDY: Everybody, whether they're institutional investors or households, basically look for policy cues from the government to decide where to put their money.
ZARROLI: This tends to make the Chinese stock market disconnected from the broader economy. Stock prices can rise when growth is falling, or vice versa. Last year, the government was worried that real estate prices were rising too far too fast and that a bubble was forming. So it began to encourage people to take their money out of housing and invest it in stocks instead. The government-controlled TV channel CCTV was filled with stories about the money to be made in stocks.
(SOUNDBITE OF CCTV NEWS SHOW)
UNIDENTIFIED MAN: Shares on this exchange have surged 55 percent this year, becoming the world's best performing stock market.
ZARROLI: The government even allowed investors to buy shares on margin, a risky form of investment that can be very profitable, but can also magnify losses. When prices began to fall this year, says Harvard economist Ken Rogoff, Beijing made some clumsy attempts to intervene.
KEN ROGOFF: They've done things like tell reporters to just write cheery stories about the economy. They poured some of the taxpayers' own money into propping up the stock market, and it's hurt their credibility. It really has.
ZARROLI: And the government went further. It suspended trading in some shares and barred large investors from selling their holdings. At some point, though, Beijing seems to have decided to stop trying to prop up stock prices. Rogoff says prices plummeted, and a lot of ordinary investors have been hurt.
ROGOFF: Some people put their money in at the peak, and they've lost, you know, big chunk of their life savings, and this is very awkward politically.
ZARROLI: Rogoff says the Communist Party's power rests on its long record of improving the economic lives of its people. For the government, the risk is that the market turmoil and the overall slowdown in growth the country faces will undermine that authority. Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.