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Top1. Introduction
In recent years, many countries have seen financial crises and economic turbulence triggered by sharp fluctuations of asset prices. In order to contain the crises, it has become increasingly common for the government to adopt non-market approaches to manage or interfere with the market. The period from 2015 to 2016 saw three large-scale crashes in China’s A-share market, during which the stock index dropped by 49% in half a year and the market value evaporated by about 36 trillion yuan. In the effort to stabilize market expectations and safeguard the overall safety of the financial system, the Chinese government introduced bailout measures to prop up the market, most notably the “national team” represented by China Securities Finance and Central Huijin Investment, could enter the secondary market to buy and sell stocks directly. According to the shareholding situation reported in the third quarter of 2015, the “national team” held a total of 1081 stocks, accounting for 38.76% of the total number of A-share listed companies in Shanghai and Shenzhen then, with a holding market value of 1.16 trillion yuan, accounting for 4.12% of the stock market value (Li et al, 2019). Also, the Chinese government released frequent signals to the market to foster its confidence.
Different from the diversified bailout approaches of foreign governments, Chinese government often adopts the more direct approach to contain the irrational panic of investors during crises, as a combined result of the immature Chinese financial market, which is mainly composed of inexperienced individual investors, and the paternalistic regulatory culture of the Chinese government. This paper addresses the following questions: Is the Chinese government’s bailout of the market effective in a stock market crisis such as the COVID-19 epidemic, considering its absolute authority? Does the government’s authority ease investors’ panic? Which kind of stocks are more susceptible to government bailout? Currently, there is not much research literature on Chinese government’s bailout of the market. Therefore, this paper uses data from Chinese A-share market to study the impact of Chinese government’s direct bailout approach on investors’ psychology and its internal mechanism during the stock market crisis. This paper is helpful in term of revealing the impact of Chinese government’s bailout approach on market stability, summarizing the experience and deficiencies of Chinese financial market practices, and understanding the methods and effects of Chinese government’s management of and intervention in the financial market in time of a crisis.
The structure of the rest of this paper is arranged as follows: The second part reviews the relevant literature; The third part introduces research methods and data samples; The fourth part shows the mechanism and negative effects of Chinese government’s direct bailout approach on investors’ crisis sentiment; The fifth part is the conclusion.