Policy Interventions and China’s Stock Market in the Early Stages of the COVID-19 Pandemic

Abstract: China’s stock market greatly outperformed other national markets during the first several months of the COVID-19 pandemic, and it did so even before it became evident that early containment efforts would flounder in the United States and many other countries. As to why, one view holds that aggressive monetary and credit easing propped up Chinese equity values. To assess this view, we consider several interventions that eased monetary and credit conditions in the first six months of 2020. Our analysis finds clear evidence that these interventions raised implied stock market volatility but little evidence that they influenced stock price levels. We also consider policy actions that restricted short selling, limited stock sales, and boosted stock purchases. These efforts to raise net equity demand were small in scale and highly time-limited, as we discuss, suggesting that any direct effects on stock prices were also modest. Neither our study nor other work known to us provides a ready explanation for the extraordinary performance of China’s stock market in the first half of 2020. This performance is even more striking in hindsight, given later developments in China’s economy and stock market.

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