Nothing appeared more serious than the market-wide setback for Chinese stocks as the Shanghai Composite Index fell to 2000 and may, as some analysts fear, fall further to 1900.

There are analysts who recommend buying despite the short-term trends because they think the government feels obliged to interfere with the market and it has plenty of ammunition. Even a small increase in a holding by a national financial investment company, pension or housing fund would help give a boost to the general index - now it is already so low.

But the interesting thing is why does a sensible government have to act so immediately to protect the market whenever some companies feel some pain?

It is a kind of government interference to try to hold up the price level whenever the market is in trouble. But it is also a kind of government interference if it deliberately chooses not to do so even though previously it did interfere in similar cases. In fact, for the last couple of weeks, there have been columns in the Chinese business press trying to decipher the hidden intention of what they called the "strategic inaction" of the cabinet led by Premier Li Keqiang when the economy as a whole is surrounded by discouraging news from all fronts - from manufacturing and trade to the piling up of debt.

One of the direct causes of last week's market tumble was a reported shortage of money in the financial services industry, as reflected by an unprecedented rise in Shibor, the Shanghai Interbank Offered Rate - the benchmark interest rate used in renminbi lending activities between banks.

On Friday, the Shibor fell after the People's Bank of China, the central bank, reportedly injected some short-term liquidity. But that was an action the Chinese usually call fine-tuning, not a wholesale intervention like raising or cutting interest rates or rolling out or scaling back nationwide public investment programs.

A little short-term liquidity doesn't change the big picture. By logic, in an economy that is no longer racing ahead as it used to, it no longer generates so much demand for credit. But despite a slowdown since the beginning of 2012, the lending and borrowing business has shown no sign of a considerable reduction.

At such a point, no sensible government would be willing to see banks continuing to lend and borrowers continuing to borrow. It must take some resolute methods to rein in the rise in debt - but hopefully produce fewer side effects on other industries. One such methods is to limit short-term liquidity to force lenders to cut back their business activities.

By keeping short-term liquidity at a low level for three months, some analysts said, the central bank will see some financial institutions (although not major banks) either close down or restructure their corporate leadership.

Financial services that are affiliated, in one way or another, to local governments are the ones that are the most unruly in the market and careless regarding internal controls. They serve as an unwanted bridge between shadow banking and official banking and are the source of a lot of official corruption. They will have to go. And "strategic inaction" on the part of the government is really the best thing it can do.

But, of course, not having any side effects is only what people hope for. There will be a side effect - and that will be a dampening effect on the stock market, especially for the smaller financial companies and businesses that are running a high level of debt.

Contact the writer at edzhang@chinadaily.com.cn

(China Daily USA 06/24/2013 page15)