China's financial world has officially entered the paranoia zone. As the Shanghai stock market experiences its worst three-week rout since 1992 — in defiance of government efforts to reverse the plunge — government officials are blaming shadowy conspiracies for the sell-off.
One narrative whipped up by state-run media has nefarious overseas forces driving down shares to embarrass President Xi Jinping and stymie China's development. Another conspiracy theory suggests that rumor-mongers are driving shares lower in order to profit from short selling. That's prompted regulators to pledge a crackdown on "vicious" short sellers: Just ask Morgan Stanley, the recent subject of "hidden agenda" allegations by mainland media for voicing bearish views on the trajectory of Shanghai shares.
The problem is investors now recognize that China's years-long rally was based more on hype than fundamentals, and they're looking to reduce their exposure. But rather than deal with that reality, Xi's team has been feverishly resisting it, including with interest rate cuts, a moratorium on initial public officers, and a stock-buying fund.