Beijing's intervention in market short-sighted
The central government bathed in the praise of happy investors yesterday after the mainland's main stock index, in Shanghai, enjoyed a record one-day gain. The sentiment was understandable, given that the dramatic turnaround in a bear market was inspired by a two-thirds cut in stamp duty on share trading to 0.1 per cent. The measure succeeded overnight in restoring confidence to the market by fulfilling hopes of government intervention. But for how long, in the face of unchanged economic fundamentals, remains to be seen. It is a short-term solution that does not tackle basic issues that are central to the long-term prosperity and stability of the market.
The government's intervention also raises another serious question. Much has been made recently of the issue of moral hazard in regard to bailouts of American financial institutions in the wake of huge losses arising from the subprime mortgage crisis. The term refers to the expectation created by such rescues that investors will not be fully exposed to the risks they take. There can be few more egregious examples of moral hazard than the central government's action. It targets tens of millions of small investors. In itself, the cut in the trading tax will not add up to much cash in the hand, except for big investors. Its real significance is the message it conveys to small investors - that the government stands ready to bail them out if they lose money in the market.
The sustained fall in the market followed a phenomenal rise last year. Supporters of the stamp-duty cut point out that the tax was raised by the same amount to cool last year's market boom. A source close to the China Securities Regulatory Commission said it believed 3,000 points was rock bottom for the main index, a level it has fallen through this week, albeit briefly. The fall should, however, be seen as bubble-deflating and good for the market's long-term health. A lot of people were burned, but that is a risk inherent in markets. The argument for a 3,000-point market floor does not stand up against price-earnings ratios for mainland-listed companies, which are well above those in Hong Kong. Comparatively speaking, Shanghai companies remain expensive.
Investors cannot now be blamed for expecting the government to step in every time they lose money in what should be the normal ebb and flow of markets. On this occasion, the importance attached by government leaders to creating a harmonious social environment for the Beijing Olympics may have been a factor in the timing of government intervention. The government does not relish the prospect of tens of millions of unhappy small investors during an event meant to showcase China's modern achievements to the world. But if this was a motivation, political considerations overrode common sense. While analysts anticipate more upside in the current rally, they do not rule out a fall in the longer term because of economic fundamentals. Will the government step in again? Will investors never learn their lesson?
Premier Wen Jiabao has said the government is responsible for setting up open, fair and transparent markets in which the interests of investors are protected. But the markets will never mature if regulators continue trying to control market forces by meddling in listings, share placements and price-setting. They create expectations the government will also step in to influence the market. Officials would be sensible to promote their objective by directing regulators to focus on creating an orderly, transparent environment in which market forces can run their course.