Market manipulation proves irresistible, and not just in China

Stephen Roach says China's stock market interventions are targeting the same problem that advanced economies have tried to curb with their quantitative easing measures: asset bubbles

PUBLISHED : Tuesday, 28 July, 2015, 2:42pm
UPDATED : Thursday, 30 March, 2017, 3:19pm

Market manipulation has become standard operating procedure in policy circles round the world. All eyes are now on China's attempts to cope with the collapse of a major equity bubble. But Chinese authorities' efforts are hardly unique. The leading economies of the West are doing pretty much the same thing - just dressing their manipulation in different clothes.

Take quantitative easing, first used in Japan in the early 2000s, then in the United States after 2008, then in Japan again from 2013, and now in Europe. In all of these cases, quantitative easing essentially has been an aggressive effort to manipulate asset prices.

Whether this strain of market manipulation has accomplished its objective - to provide stimulus to crisis-torn, asset-dependent economies - is debatable: current recoveries in the developed world have been unusually anaemic. But still the authorities try.

The PBOC is actually better positioned than other central banks to maintain control over monetary policy

China's efforts at market manipulation are no less blatant. Official actions run the gamut, including a US$480 billion government-supported equity-market backstop under the auspices of the China Securities Finance Corporation, a US$19 billion pool from major domestic brokerages, and an open-ended promise by the People's Bank of China (PBOC) to use its balance sheet to shore up equity prices. Moreover, trading was suspended for about half of the listed securities.

There are several noteworthy distinctions between China's market manipulation and that seen in the West. First, Chinese authorities appear less focused on systemic risks to the real economy.

Second, in the West, post-crisis reforms typically have been tactical, aimed at repairing flaws in established markets, rather than promoting new markets. In China, post-bubble reforms have a more strategic focus since the equity-market distress has important implications for the government's capital-market reforms, which are viewed as crucial to its strategy of structural rebalancing.

Finally, by emphasising a regulatory fix, and thereby keeping its benchmark policy rate well above the dreaded zero bound, the PBOC is actually better positioned than other central banks to maintain control over monetary policy and not become ensnared in the open-ended provision of liquidity that is so addictive for frothy markets.

With a large portion of China's domestic equity market still closed, it is hard to know when the correction's animal spirits have been exhausted. While the government has considerable firepower to limit the unwinding of a spectacular bubble, the overhang of highly leveraged speculative demand is worrying.

As with Japan, the US and Europe, there's no doubt what prompted China's manipulation: the perils of outsized asset bubbles. Regulators, policymakers and political leaders keep condoning market excesses. In a globalised world where labour income is under constant pressure, the siren song of asset markets as a growth elixir is far too tempting for politicians to resist.

Speculative bubbles are the visible manifestation of that temptation. As the bubbles burst - and they always do - false prosperity is exposed and the defensive tactics of market manipulation become both urgent and seemingly logical.

Therein lies the great irony of manipulation: the more we depend on markets, the less we trust them. Needless to say, that is a far cry from the "invisible hand" on which the efficacy of markets rests. We claim, as Adam Smith did, that impersonal markets ensure the most efficient allocation of scarce capital; but what we really want are markets that operate only on our terms.

Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China. Copyright: Project Syndicate