China needs to let more air out of its equity bubble

WHEN historians write the definitive accounts of the great Chinese stock bubble of 2015, this weekend’s rate move may deserve its own chapter. By cutting borrowing costs to a record low, governor Zhou Xiaochuan told a hundred million mainland day traders to keep on buying.

Great intrigue surrounded the silence of the official media last week amid the biggest two-week plunge in stocks since 1996. Xinhua had been the loudest cheerleader, churning out countless stories on the wisdom and patriotism of buying shares. So when Xinhua, long considered the “throat and tongue” of China’s government, suddenly went quiet, punters figured the rally was over.

Zhou stepped up on Saturday to disavow that notion with a three-pronged easing. Traders called it the “Zhou put”, a reference to Alan Greenspan’s penchant for rescuing markets when he led the Federal Reserve in the 1990s and 2000s (the “Greenspan put”). The People’s Bank of China cut the benchmark lending rate by 25 basis points to 4.85 percent, reduced the deposit rate by a quarter percentage point to 2 percent and lowered the required reserve ratios for some lenders. The clear message: Don’t worry stock-buying comrades, we’ve got your back.

Danger