China’s frantic intervention to prop up stock market makes global ambitions harder to reach
Like a would-be mother who wants to give birth without the bother or pain of pregnancy, China’s financial authorities want to have big stock markets but without the turbulence and excitement they produce.
Thus when Chinese share prices tumbled the authorities lashed out to unearth scapegoats who could be held responsible for the fall, this was followed by a slew of regulatory and other measures aimed at keeping the downward price spiral from turning into a rout.
When the bubble burst last month commentaries in the state media muttered darkly about foreign plots to undermine the Chinese markets. This was followed by the ‘discovery’ that short sellers were further depressing prices and were probably causing the problem.
To believe any of this requires a remarkable lack of knowledge about the Chinese stock market which is overwhelming a domestically traded market and unusually heavily dependent on individual investors as opposed to institutional traders.
As for the role of short sellers, they have behaved in the Chinese markets as they have in every market where short selling exists. This behaviour can be summed up in a single word: opportunism. Seeing that money was to be made in a market where prices were set to fall they acted on this logic and anticipated the price drop. This may well have accelerated the decline but it was not its cause.
The cause was there for all to see, indeed it was so obvious that I wrote about it in this space back in Mid-April. Even then it was staggeringly obvious that prices were out of line with potential corporate earnings and were soaring away in a manner that made no economic sense whatsoever.
However markets have a habit of not behaving rationally, both rising and falling beyond levels that are commensurate with the underlying value of the corporations that have chosen to offer themselves up for listing. The history of markets shows that despite this irrationality, prices will eventually resume a level that reflects reality.
The problem is that there can be a very bumpy ride before reaching a sensible destination and it can be of quite long duration and involves some rather dazzling figures.
A clever piece of numerical comparison that recently appeared in the New York Times pointed out that the approximately US$2.7 trillion that has been whipped off the value of Chinese stocks is equivalent to six times Greece’s entire foreign debt. As we know what problems the debt crisis has been causing, there can be no doubt that this is a humungous sum of money.
No wonder there is a degree of unease in the corridors of Zhongnanhai, especially in the wake of frequent declarations that the virility of the stock market was a reliable indicator of confidence in the economy and indeed an endorsement of government policies. Logically, a sharp market fall indicates a rather different view.
Thus we have seen a plethora of moves to push prices back up.
This includes an order for the largest mutual funds and brokerages to buy big and not to sell. The nation’s sovereign wealth fund has also been mobilised to buy shares. Banks were ordered to reduce interest rates and lower the amount of money commercial lenders need to park with the central bank, the aim being to increase liquidity for share buying.
New IPOs have been reined in so as to leave funds free for buying existing issues. This was followed by widespread suspension of listed companies’ shares in both of China’s markets. Drastic measures of this kind generally have an effect but Chinese stock prices have stubbornly continued to fall, not least because investors are behaving rationally in getting prices down.
Now more action is being demanded but even if yet more measures are introduced they will provide no more than a short-term palliative.
But what of the longer term? Once investors realise that the stock market is vulnerable to massive government intervention it axiomatically ceases to become a free market. The consequences of this are all too evident. Look at what happened in the Hong Kong market when the government got into a panic during the Asian financial crisis and used public money for a massive buying spree to prop up share prices.
Apologists for this panicky behaviour maintain that it achieved its objective because price falls were curbed. However the same kind of rout was underway in Singapore but its government remained on the sidelines and, guess what, its market recovered to more or less the same degree.
The difference is that some two decades after this debacle Hong Kong is still saddled with the overhang of this buying spree. China, which is at an earlier stage of developing a truly international market, has chosen to make its global aspirations harder to achieve.
Stephen vines runs companies in the food sector and moonlights as a journalist and a broadcaster