Source:
https://scmp.com/article/635136/beijings-intervention-market-short-sighted

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.