SHANGHAI — Lu Tao can’t sleep. He gets bouts of panic at night. And he’s too afraid to tell his parents why.
The 23-year-old university student in Hangzhou, a city on China’s eastern seaboard, has a stock-market problem. He borrowed 200,000 yuan, or $32,215, from his mom and dad, piled the money into mainland shares without their permission and got caught in the biggest sell-off in two decades.
At first, Lu considered liquidating his holdings and owning up to the losses. Now that China’s government has arrived to rescue the market, he has decided to bear the sleepless nights, keep his parents in the dark and stay invested.
“I won’t exit,” he said. “I still see value, and I believe government policies will safeguard it.”
Lu’s unwavering faith in Chinese policymakers illustrates the growing risk of moral hazard in the world’s second-largest stock market, an unintended side effect of government efforts to halt a $3.9 trillion sell-off.
While the support measures helped spark a recent 13 percent rally in the Shanghai Composite Index, the risk is that investors come to view the market as a one-way bet — fueling bubbles that authorities might struggle to control.
“You don’t want to give the market the impression that whenever it comes down, you’ll be there,” said Tai Hui, the Hong Kong-based chief Asia market strategist at JPMorgan Asset Management, which oversees about $1.7 trillion.
The moral hazard problem is particularly acute in China because authorities stepped in at a time when stock valuations were still expensive, said Francis Cheung, a strategist at CLSA in Hong Kong.
At 60, the median price-to-earnings ratio on mainland bourses is higher than in any of the world’s 10 largest markets.
The ratio was 68 at the peak of China’s equity bubble in 2007, data compiled by Bloomberg show.
“The government is in a dilemma,” Cheung said by e-mail. “They promoted the market on its way up, and now that it has crashed, there are investor expectations that the government will rescue them.”
Policymakers have gone to unprecedented lengths to prop up stocks. They banned large shareholders from selling stakes, ordered state-run institutions to buy equities, allowed the central bank to finance stock purchases and let more than half of companies on mainland exchanges halt trading.
