A-share investors test line in the sand
Steering stock prices is not easy, even when the state dominates the market.
China's rulers want share prices to rise. As the market has sunk from last year's high, officials nervous at the prospect of growing anger among loss-making investors have adopted a succession of measures all intended to boost Shanghai- and Shenzhen-listed shares.
They have raised the investment quotas for approved foreign institutions; they have given the go-ahead for more domestic mutual funds; and they have slapped restrictions on the sale of large blocks of shares in state-run companies, all to no avail.
Then, last week, with the benchmark Shanghai Composite Index down 50 per cent from October's high to within a whisker of the 3,000 mark, they acted again, slashing stamp duty on share trades by two-thirds, reversing an increase imposed last May.
The initial effects were dramatic. As news of the pending tax cut leaked out, the market began to climb, leaping 9.3 per cent on the announcement, to finish Thursday up an enormous 15 per cent in just four days. Trading volumes soared, approaching levels seen before last May's tax increase hammered activity.
But then enthusiasm began to wane. The index slipped 0.7 per cent on Friday as investors took profits, falling a further 2.3 per cent yesterday in response to some grim first-quarter earnings.
This threatens to put the authorities in an awkward position. By stepping up the tempo and scale of their market-supporting measures over the last two weeks, they have made it clear they do not want to see the index fall below the 3,000 mark. But their attempts to boost prices could well prove self-defeating.
The trouble with drawing a line in the sand is that investors will naturally step up to it in order to test the authorities' mettle.
Each time the government has meddled in the market, it has reinforced the impression that prices move not in response to underlying valuations or corporate earnings prospects, but in reaction to official policy actions.
As a result, it makes sense for investors to hang back each time officials attempt to boost the market, in the expectation of even more supportive government measures when prices fail to rally.
This tendency has already become clear following last week's tax cut. The reduction in stamp duty will not be enough to boost prices beyond the short term, players say. If the government really wants to boost the market, it will have to allow investors to leverage up and buy stocks on margin.
However, even that may not be enough to reverse the bear market. As Glenn Maguire of Societe Generale pointed out in a research note last Friday, in the past it has not been measures influencing demand for stock that have succeeded in reversing market direction but, rather, regulatory changes affecting the supply of shares. Even if the authorities were to allow margin trading, it might take further steps to block the sale of state-held shares before investors fully regain their confidence.
But that would only exacerbate the problem and encourage further volatility. Rather than trying to steer prices, the authorities would do far better to stand back and allow the market to sink to a natural bottom at which investors once again find valuations compelling, even if prices do overshoot along the way.
