Societe Generale's Albert Edwards thinks there's much more at stake with what's happening to Chinese stocks.
In a note to clients Friday, Edward writes that apart from the stock market, what could also suffer is the reputation of Chinese authorities, who are taking drastic steps in what's meant to be a free market.
Edwards notes, via Templeton Investment's Mark Mobius, that what the government is doing would end up inspiring fear, not confidence, in the market, because it shows desperation.
And that loss of confidence could spread to the rest of the world, because the Federal Reserve and the European Central Bank have created similar stock bubbles, according to Edwards.
Here's Edwards, who said his views are not shared by Societe Generale (emphasis added):
The same loss of confidence in the omnipotence of the Chinese authorities will surely ultimately swirl westward. The Fed and the ECB have created similarly grotesque stock market bubbles in an effort to shore up their anemic economic expansions. Do not be surprised when the S&P collapses in exactly the same way as the Shanghai stock exchange, and don't expect the panic monetary measures that will be enacted (more QE) to prevent the ultimate denouement of this global equity Ponzi scheme.
The steps that Chinese authorities have taken seem to be working, for now. Chinese stocks had a second strong day on Friday, with the Shanghai Composite index gaining 6.4%. Thursday was its strongest day in six years.
Last weekend and early this week, Chinese authorities strongly intervened to arrest the plunge of the stock market. Some of their steps include a ban on major sales by shareholders for six months and forcing students to chant slogans praising the market.
But this will ultimately end badly, Edwards says.
He recalls that Pakistan did something similar in 2008, by putting a floor on the Karachi SE100 to arrest its plunge. When trading resumed, the market continued its free fall.
Edwards again:
It is not just that the authorities are thrashing around with various extreme measures to prevent the ongoing stock market collapse, and that the state-run media are blaming short sellers and foreigners for the free-fall. The wholesale suspension of stock trading will inevitably only temporarily prevent further collapse.
Via Edwards, this is what has happened to the Chinese stock market when the government stepped in:
