China’s Stock-Market Interventions Postpone Grim Reality

China steadied its stock market Tuesday, but investors can hardly exhale. Despite erasing nearly all of 2015’s gains, the market is probably still not reflecting reality.

Two unequal forces are fighting over China’s stock market. And there is likely carnage yet to come.

The government on one side is putting up a chaotic fight to prove that there is a floor to share prices. It has squeezed investors’ ability to trade, intervened directly by scooping up shares and prevented efficient price discovery generally.

On the other side is reality, a bitter set of truths that for China mean a slowing economy, a sliding currency, capital outflows, still-high valuations on stocks and too much leverage. Chinese investors are learning yet again that reality tends to prevail in the end.To stop a market landslide for the second day in a row, Beijing injected liquidity into the interbank market and hinted that it would postpone the expiration of a ban on share sales by those who own more than 5% of companies. Direct state buying of shares, as seen frequently last summer, may have turned a 3% drop in the CSI 300 index 45 minutes before the close into a finish down just a quarter of a percent. The central bank also intervened in currency markets to prop up the yuan.

Investors can hardly exhale. Despite erasing nearly all of 2015’s gains, the stock market is probably still overvalued. Strip out the banks, which investors have long ago written off, and the CSI 300 index of stocks trades at around 20 times next 12 months’ estimated earnings according to Citigroup. That is down substantially from a peak near 35 times, but still well above the mid-teens that they traded in the three years before China’s bubble inflated starting in the second half of 2014.