Managing China's Stock Markets: The Economics of the National Team

We exploit China’s great stock market crash in 2015 to study the effects of government stock purchases. The Chinese government purchased stocks to stabilize the market through state-owned financial institutions collectively called the “National Team”. We find that the intervention led to reduced volatility, trading volume, and price informativeness. These impacts mainly come from the disclosure of the government portfolio.These results are consistent with the heterogeneous beliefs and global game literature, where more consensus reduces trading, and more precise public information undermines information production. The paper suggests some fundamental trade-offs facing government purchase of stocks in a second-best world.