Investors need to know more, and well in advance
Early information has always been the investors’ most powerful weapon in monitoring stock markets. And clear signals from the policymakers themselves have remained among the most important ways of finding out exactly what they need to know, especially during unpredictable turbulence.
But do rule-makers have an obligation to tell people what they are thinking, even before they announce a policy?
Around midnight on July 1, nearly three weeks after the benchmark stock index plunged more than 20 percent from a seven-year high of 5,178.19 points on June 12, a business news reporter I know posted a picture to a chat room on WeChat, which showed that the headoffice building of the People’s Bank of China, in Beijing’s Fuxingmen area, still had many lights on.
That day trading had been turbulent. Some had been suggesting a group of short sellers had been plotting to destroy the market, while others speculated the financial regulators were set to launch measures to curb the turmoil.
Despite countless phone calls and e-mails to the bank’s press office, officials remained silent, as public concern grew.
“The PBOC refused to say anything on what it might be doing to save the market, so we thought we would go down there and see whether anyone was working late at the central bank,” the colleague from another news media organization told me.
“It was certainly unusual to see so many lights on that late, so I guessed officials were working on a rescue plan.”
It was another week until a series of policies finally came to light, targeted at lifting stock prices— but of course, the market hadn’t waited.
By then, panic had set in, the index had dropped sharply to a four-month low of 3,373.54 points, and nearly $3.5 trillion of value had been wiped out in less than a month.
Without a mature information system in place, it is hard to manage any market’s expectations or fears. Rumors quickly turned into knee-jerk reactions, and in a market so dominated by small-scale investors, such as China, the public often choose to believe the most scary.
Even a cut in interest rates by 25 basis points and a reduction in the cash amounts that banks must have in reserve by 50 basis points, on June 27, had failed to boost market sentiment or curb fears.
The cuts made that Saturday evening came completely out of the blue.
I, like many, was having dinner withmy family, so even then, information on the measures aimed at calming the market were not effectively passed onto the public.
After the 2008 financial crisis, the United States Federal Reserve accepted that “Forward Guidance” should become an important part of monetary policy — a tool to manage market expectation through public communication.
Under the framework, the US central bank now needs to give the public ample notice of any plans to change the tone of monetary policy.
The Fed holds meetings to discuss future policy trends almost every month, and also gives its predictions on economic growth, inflation and unemployment.
The central bank sends out the guidance when it’s ready. It requires accurate economic predictions made by a professional research team, and most importantly, it has an independent Monetary Policy Committee to make final decisions. The public get to know of any major information at a news conference after each meeting.
Even if you spend 24 hours a day, seven days a week on social networking sites, or monitor any of the countless media outlets covering the markets in China, you can never be fully confident of noticing every movement — but surely it is the duty of the rule-makers themselves, to give people the information they need to know, so they can either react, or be reassured. Contact the writer at email@example.com