It is hard to imagine that all this behind-the-scenes manipulation will not dent the confidence of investors in the future: the already tenuous connection between share prices and actual corporate value will now be even more uncertain, when the government, in effect, has its thumb on the scales. Added to that fear is the real possibility that shareholders who re-enter the market may find themselves in the future holding untradable and therefore illiquid shares if the government again decides to freeze market operations in response to a sharp decline. Almost immediately after the crash, the overseas investors who had bought into Chinese companies through the Hong Kong exchange began pulling their capital out of Chinese stocks – the most prolonged period of net outflow since the programme of trading via Hong Kong began last November.
So it is still far too early to speak of China’s stock markets as having “stablised” or “returned to normalcy”. (To begin with, many company shares are still not trading.) By making the risky choice to move in and prop up share prices as they fell, party leaders effectively took ownership of markets whose proper functioning requires them to remain independent. Evidently, they felt that their credibility as China’s grand air-traffic controllers was being put at risk – that they would lose credibility, respect and even face if they did not confront the plunging market head on and at least give the appearance of being in control.
Orville Schell
A ‘lose-lose’ situation: letting markets fall without intervention would have damaged the image of the central leadership and, more importantly, the confidence of locals putting their savings into Chinese stocks. But intervening damages the confidence of foreign investors in the long run, which could have negative consequences for future growth and China’s ambitions. If the government continues this policy of artificially propping up markets it will gradually drive away long-term investors, the economy will accumulate large imbalances and the state will end up owning large amounts of shares in inefficient companies that should have been restructured or closed long ago. I think it would have be healthier to just let the storm pass, allowing the markets to stabilize at lower values. China has enough potential that shares would have gone up organically again, just a bit slower than before.
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