Rather than adopting a contemporary Western architecture for its stock markets, which privileges efficiency and speed over stability, China must develop its own path.
The global economy seems, once again, to be in unchartered waters. No one quite knows what is going on but recent explanations have included the historic low price of oil, the US Federal Reserve’s interest rate hike and China’s slowing economy. The latter has lately come to the fore, as China’s stock market troubles have made world headlines for all the wrong reasons: above photographs of elderly Chinese watching images of collapsing share prices. This is an image we don’t see with other stock market crashes around the world: weeping traders, maybe, but not weeping grandmothers.
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A woman reacts as she checks stock prices at a brokerage house in Fuyang, in Anhui province. China’s stock market is unique – 80 per cent of transactions come from individual traders, rather than funds or financial institutions. Photo: AP
China’s market volatility has become the convenient scapegoat for global economic unease, providing another opportunity for all and sundry to blame Chinese regulators and particularly its not-so-free market. But even if Chinese officials think this is unfair finger-pointing, they should view it as a historic opportunity to take stock and redirect its still nascent stock market so that it truly serves its economy in the long term, given China’s unique position in the world today.
It is not clear that Beijing knows how to resolve this latest market volatility. Chinese regulators have admitted they had no experience of managing the circuit breaker mechanisms put in place after the last stock market crisis, and have accepted that these have only deepened the problem. This situation does not make Beijing look good.
Passengers wait to board a train at a station in Hefei, Anhui province. China’s rapid development and population size makes building a stock market a unique challenge. Photo: Reuters
It is perhaps not too outrageous to ask why China even bothers with a stock market. After all, even its best-known company, Alibaba, did not list in China when it went public. Beijing has placed much of its economic and political credibility on a strong stock market driven by the desire to match those in the West. This emulates a similar belief in the West that a strong market is a symbol of national prestige: one need only look at how Western media worry when their markets do poorly, and crow when Chinese markets stumble.
The financial policymakers in China would do well to remember the central purpose behind shares and stock markets: they are a way for companies to raise capital from the general public by opening up their ownership structure. The theory is that, in exchange for investments, investors get a regular income through dividends when the stock performs well. A market allows an investor to “cash out” when he or she needs money, perhaps for emergencies, large purchases or retirement income. Implicit in this is taking a long-term view.
China’s market volatility has become the convenient scapegoat for global economic unease, providing another opportunity for all and sundry to blame Chinese regulators and particularly its not-so-free market
A stock market is not – or should not be – a casino for daily speculation, despite today’s rapid hour-to-hour, or even second-to-second, trading. The “flash crash” of May 2010, where US stock markets collapsed and recovered in a matter of minutes, is an extreme example of this high-speed, high-stakes trading.
