A price to pay

China Daily (Canada) - - FRONT PAGE -

The cen­tral gov­ern­ment’s strat­egy to sta­bi­lize the stock mar­ket has largely worked as in­tended. The main pur­pose is not to prop up share prices as many in­vestors wrongly as­sume, but to al­low the bub­ble to de­flate in a man­age­able man­ner rather than burst­ing out­right.

Since the mar­ket sta­bi­liza­tion cam­paign be­gan last week, panic selling by the army of re­tail in­vestors has largely sub­sided. To be sure, the un­wind­ing of mar­gin trad­ing po­si­tions will take much longer. But the freefall in the past week was sim­ply part of the ad­just­ment process, and the threat of a sys­temic melt­down has largely been neu­tral­ized.

The suc­cess of the gov­ern­ment’s decisive ef­forts has come at a price. Such mas­sive and high-pro­file gov­ern­ment in­ter­ven­tion is seen by many econ­o­mists as a roll­back of years of ef­forts to open up the cap­i­tal mar­kets. The set­back could stall the progress in the in­ter­na­tion­al­iza­tion of the yuan as the per­ceived fragility of the cap­i­tal mar­ket has made the lift­ing of cap­i­tal ac­count con­trol seem­ingly too reck­less.

A more tan­gi­ble dam­age ap­pears to have been done to the stock ex­change’s trad­ing mech­a­nism. The trad­ing sus­pen­sion of more than half of the main­land’s listed com­pa­nies’ shares, os­ten­si­bly to al­low ner­vous in­vestors time to cool off, was in di­rect vi­o­la­tion of the free mar­ket prin­ci­ple. It blocked the es­cape routes of even cool-headed in­vestors who wanted to cut their losses. The sus­pen­sion of so many listed stocks would achieve noth­ing more than pro­long­ing the ad­just­ment process by forc­ing in­vestors to hold onto shares they deemed to be over­val­ued.

Many com­men­ta­tors have laid the blame for the crash on mar­ket ma­nip­u­la­tion by un­named in­vest­ment com­pa­nies that are said to be short selling in­dex fu­tures on a mas­sive scale. Reg­u­la­tors have vowed to in­ves­ti­gate the oper­a­tions of these short sellers, some of whom are re­port­edly based in Wen­zhou, the hot­bed of pri­vate-sec­tor en­trepreneurs with a well-known ap­petite for risk-tak­ing.

It’s not clear if the author­i­ties have launched the probe, or who are be­ing tar­geted. But the main­land media and In­ter­net com­men­ta­tors have al­ready started a pub­lic­ity cam­paign against short selling in the in­dex fu­tures mar­ket. The cam­paign has made short selling seem like some sort of so­cial and eco­nomic crime by rob­bing hun­dreds of thou­sands of el­derly men and women who sim­ply wanted to sup­ple­ment their mea­ger pen­sions by punt­ing on stocks.

The so­cial stigma around short selling poses a se­ri­ous threat to the de­vel­op­ment of the in­dex fu­tures mar­ket, which is ex­actly the mech­a­nism the author­i­ties would want to pre­serve and pro­mote be­cause of its func­tion in mar­ket sta­bi­liza­tion.

The mar­ket al­lows in­vestors who take a bear­ish view to short the in­dex to lock in gains rather than un­load hold­ings that could de­press the mar­ket. The fu­tures mar­ket can’t func­tion with­out short sellers and spec­u­la­tors who pro­vide the counter -trades. This is cer­tainly not the price reg­u­la­tors in­tend to pay. The au­thor is a se­nior fi­nan­cial editor at China Daily Hong Kong.

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