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The intervention has also created new problems. By wading in so heavily, the fate of stocks now sits in the hands of officials. Rumours earlier this week that the China Securities Finance Corporation, a public institution responsible for buying shares, had started selling its holdings was enough to trigger a stampede to the exits. Chinese stocks fell 8.5% on Monday, their worst day since 2007. Authorities had to move quickly to calm nerves. The securities regulator denied that the “national team” had retreated from its market-rescue operation and said it would investigate investors with the gumption to sell stocks en masse. The central bank pumped yet more cash into the money market and indicated that monetary policy would remain loose.

Even if the government does manage to withdraw its support without causing share prices to crash, the long-term damage to China's stockmarket will be severe. At the height of the sell-off, just over half of companies suspended their shares from trading, hoping to avoid the rout (see second chart). Although most have now returned to the market, the message to investors is clear: if you put your money into risky stocks, you might find them frozen at a time of crisis, just when you need to cash out. What's more, regulators have halted initial public offerings, trying to limit the supply of shares and push up the prices of those already listed on the market. Past experience suggests it could be months before they lift the ban and let companies issue new shares. Add it all up, and China is left with a stockmarket in which investors take their cues from the government. Rather than bothering to assess the value of companies, they are betting on what regulators will do next. -- http://www.economist.com/

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