China and its stock markets need some tough love
For all China’s talk of cracking down on investors manipulating the market, it seems to have turned a blind eye to the fact that it is one of the biggest culprits when it comes to market interference. The regulator’s frantic move over the weekend to stabilise stock markets looks like panic and has caused more harm than good.
It’s only natural to want to protect the things you love, and what China loves is stability. That is the reason it has gone to extraordinary lengths to bring some calm to its stock markets.
On Saturday, China’s regulators took their most decisive action yet to stem what is now three consecutive weeks of losses on the Shanghai and Shenzhen stock exchanges. Both have tumbled around 30% in what is the worst month-long fall in more than two decades.
The volatility has triggered panic among Chinese authorities. The government started with a big — and unexpected — rate cut on June 27, and followed that up by putting short-sellers under the microscope and loosening requirements on margin lending.
But that was not enough, so this past weekend the China Securities Regulatory Commission (CSRC) turned things up a notch. It has pushed a group of 21 brokerage firms, led by Citic Securities, to put a collective Rmb120bn ($19.7bn) into a stabilisation fund. Alongside a group of mutual funds, the brokers have promised to buy back their own shares and hold them for at least a year.
The CSRC also vowed to improve stability through China Securities Finance, a state-backed margin financing entity, which will provide an additional Rmb100bn of liquidity to the market. If that wasn’t enough, the regulator announced that the central bank would lend from its own balance sheet if need be to support the stock market.
At the same time, some 28 companies voluntarily withdrew their domestic IPO plans despite getting the go-ahead from the authority — another bid to stem new issuance that could suck liquidity away from secondary.
Almost every possible entity rallied around the government to bring confidence back into the markets. And it initially appeared to have worked, with the Shanghai bourse rising by 8% early on Monday. But the positivity ebbed just a few hours into trading and the sell-off continued into Tuesday.
Plunging stock markets are obviously a worry for many. But the bigger concern is that the Chinese government has proved, yet again, that it simply cannot resist the temptation to intervene in its markets. Through some misguided sense of trying to protect investors, it has shown how paper-thin its adherence to a free market is.
China has put in place a dizzying array of measures in the past year to open up capital controls, with the ultimate aim of ending up as an economy where supply and demand moved markets and security valuations are determined through a price discovery process.
But through its frenzied weekend activity, the government has shown it will not step too far away from the controls.
The spectacular rally before the bear reared its head resulted in impressive gains, and so the recent decline is being perceived by many as a welcome market correction. Sure, money has been lost, but the authority’s haste to nip the adjustment in the bud will leave no room for the economy to base its stock markets on fundamentals, while also creating a moral hazard where investors will always expect the state to rush in and save them.
There’s no doubt that China’s policy makers overreacted, and the pressure now is more intense as their measures have so far failed to reverse the recent losses. But the regulator should now respond by waiting and watching, and letting the market take its own course in finding the right levels. China needs to remember that if you love something, you should set it free.