Beijing's market meddling costlier than moral hazard
with Shirley Yam
Once again Beijing has stepped in to support a falling market and as usual critics call it unnecessary intervention and a sign of an immature market. But this time, mainland policymakers have a new answer to the criticism.
'Didn't the west just bail out their banks falling in the subprime crisis in the name of financial stability?' That is the tune widely sung in Beijing. In short, who has a clear enough conscience to point his finger at us?
Indeed, the subprime crisis and the authorities' handling of it have challenged many beliefs long held by the west and by many mainland reformers as well. The crucial notion is that with a clear set of rules and freedom from government intervention, the efficient market will find the optimal solution.
US and European regulators - who pointed their fingers at the autocratic political system, poor supervision, the moral hazard created by government intervention as well as by corruption in the east during the Asian financial crisis - now witness that a crisis on an even bigger scale has erupted at home.
Instead of leaving the supposedly efficient market to work itself out, American and European central bankers chose to bail out troubled players, such as Northern Rock and Bear Stearns.
Ever since the Bank of England decided to nationalise Northern Rock late last year, there has been a new round of debate among financial officials and academics in China on the role of markets and government. And it intensified as the crisis worsened.
While the subprime episode may not have converted many reformists, it has certainly provided ammunition for interested parties lobbying for intervention in the stock market.
Much has been said about the bailouts and the cost of moral hazard. I do not intend to argue here whether what the central bankers have done in the subprime crisis was right or wrong. After all, one's actions should not be justified by one's neighbours.
What I am saying is that anyone trying to gain support from the subprime episode for a new round of market intervention by Beijing is discrediting himself and the latest intervention. The latter pales both in terms of reason and method.
The first difference is the reason for intervention. In explaining the financial support provided to JP Morgan when it rescued Bear Stearns, US Federal Reserve chairman Ben Bernanke pointed to systemic risk.
He was concerned that the sudden failure of Bear Stearns would likely have led to a chaotic unwinding of positions, doubts about the financial positions of some counterparts, shaken confidence, a further dampening of asset values and credit availability and a bad hit to the real economy.
The mainland stock market is nowhere close to that. It has lost about half of its value and wiped out possibly trillions of yuan in six months. But there is no sign that the financial integrity of institutional players - including fund houses, banks, brokers and insurers - is in jeopardy.
The second issue is how the intervention was done. While the bailouts of both Northern Rock and Bear Stearns were a well-kept secret until action was taken, every move by Beijing was well leaked.
The trading on Wednesday last week shows the scale of insider trading.
Ten hours before the government announced the lowering of stamp duty from 0.3 per cent to 0.1 per cent, the Shanghai A-Share Index was already building up steam.
The index opened low at 3,100 points in the first 15 minutes but traded all the way up to 3,278 in the succeeding hours. As trading closed, the index had shot up 4.15 per cent with volume reaching 123.8 billion yuan (HK$138.27 billion). All except a few stocks traded up. The gain was even more significant in the H-share market.
The latest intervention was no more than another successful 'dare you' campaign by interested parties to gain from insider information at an even heavier public cost.
By yielding to pressure and intervening, Beijing has confirmed 3,000 points as its political threshold and the market's bottom, making itself a vulnerable hostage in the future.
By controlling the unloading of state-owned shares, the government is destroying the hard-earned success of the share reform scheme. It is supposed to align majority and minority interests and, therefore, reduce the former's incentive to rip off the listed entity.
By having a state leader asking the fund managers to 'have political considerations' in closed-door meetings, the government is winding the clock back for the country's asset management and, therefore, its financial development.
This is a cost that well exceeds the term 'moral hazard'.
Shirley Yam is taking leave for family reasons. Her column will resume when circumstances allow