A price to pay
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.