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Tom Holland

Beijing's latest measures to support the mainland stock market have succeeded in placing a floor under A-share prices.
But in the long run, government meddling interferes with investors' ability to price risk, which defeats the purpose of having a stock market in the first place.
Of course, Beijing is not alone in tinkering with markets. Last week's financial mayhem prompted government measures around the world, from the rescue of stricken insurance giant AIG to the prohibition of short selling in financial stocks by British regulators.
Meanwhile, commentators  pointed to the meltdown as evidence of market failure and called for greater state control to ensure it doesn't happen again.
A free market fundamentalist might respond that things are working as they are meant to; investors took too much risk and now they are being punished for it.
But that argument has little appeal for governments faced with angry investors and the possibility that financial lockdown could lead to real-economy recession. As a result, state intervention is back.
Yet there is a big difference between stepping in to avert a financial meltdown in order to protect the health of the underlying economy and a government that habitually attempts to steer the direction of the stock market on a week-to-week basis.
Trying to steer markets is fraught with unseen dangers. Consider last week, when Beijing cut lending rates in what was widely seen as a bid to support stock prices. It must have seemed like a good idea at the time, with officials reasoning that if they cut lending rates but not deposit rates they would boost business activity without undermining consumer sentiment.
Unfortunately, all investors saw was that  mainland banks would earn narrower interest margins, which led them to dump the stocks, pushing the market down further.
The ensuing plunge triggered a  string of measures announced late on Thursday. These included exhorting state-controlled companies to buy back their own shares, the removal of stamp duty on stock purchases (but not sales) and news that a subsidiary of the US$200 billion China Investment Corp was buying shares in  mainland state banks.
On the surface, the measures appeared to have some merit. With the Shanghai Composite Index down almost 60 per cent from last year's high and A-share valuations at their lowest level in years (see charts), the market certainly looks cheap. With many companies at risk of over-capacity and with economic growth slowing, it could be argued that share buy-backs are a sensible way to use excess capital.
And the government's steps certainly appeared to have the desired effect, pushing the Shanghai composite up 9.5 per cent on Friday.
But scratch more closely and the state's attempts to prop up the market look less impressive.
For one thing, trading volumes on Friday were relatively scant. The market shot up because there were plenty of buyers but fewer sellers; not surprising with the government offering a tax incentive to buy but imposing a penalty for selling.
The longer-term implications of Friday's measures are questionable too. In the current environment it might be smart for private sector companies to hand capital back to shareholders. But it makes little sense for the mainland government to order state-controlled companies to buy back their own stock or for the state's sovereign wealth fund to buy up the shares of state banks.
The whole point of listing state companies on public exchanges in the first place was to force them to raise their game by exposing them to market discipline. Government attempts to allocate resources through central economic planning had proved woefully inadequate. By listing state companies, Beijing hoped the market would price their risk more accurately and allocate capital more efficiently.
Yet for the market to work requires consistency from policymakers. Certainly the government should set and enforce the market's rules, but it should not try to guide prices. That interferes with the market's  price discovery function, which destroys its ability to allocate capital efficiently.
Sceptics might point out that  the mainland stock market is a work in progress, with only a sketchy ability to price risk. They might also note that even developed markets have recently proved inexpert in allocating capital. Even so, although last week's measures may stabilise stock prices, they weaken, not strengthen, the mainland market's ability to function properly. If anything, they are a step backwards, not a reason to celebrate.



State intervention    no cause for joy