Stock plunge shows need for unconventional moves to shore up A-share investor confidence
Following the stock market rout in the US on Wednesday, stocks listed on the Chinese mainland plunged Thursday, with the benchmark Shanghai Composite Index breaking below 2,600 points in afternoon trading to close at 2,583.46 points.
It’s time for China to take firmer measures to stabilize the market and restore investor confidence.
In the US, strong economic growth has distracted too many stock market investors from the real dangers of a trade war, but the facts have proven the market was too optimistic. Under pressure from multiple factors, US shares plunged on Wednesday, depressing investor confidence around the world.
On Thursday, about 1,000 mainland stocks fell by the daily limit of 10 percent. China must urgently and appropriately handle the negative impact of the US market crash on the Chinese economy.
Quickly mobilizing all resources can shore up confidence in the markets. First, the authorities can encourage some A-share listed companies to repurchase their shares that are currently trading below net asset value.
Second, the government can speed up the approval process to allow public pension funds to be invested in the stock markets. In 2008, when China managed to minimize the negative impact of the global financial crisis, it cut the stamp duty for stock transactions, which directly resulted in a surge in Chinese shares. Now, China’s economy is under even tougher pressure due to external challenges and threats, and Beijing may need to draw up correspondingly strong policies to restore investor confidence and stabilize the economy.
The trade dispute may have been the straw that breaks the camel’s back for the US stock market. China must prepare for a deteriorating situation in the US markets and increase its ability to resist external risks. It won’t be easy in the era of global interdependence, and it may call for unconventional methods.
Amid escalating trade friction, China must strengthen its firewall against contagion from economic uncertainty arising in the US. The best choice is to inject stronger internal impetus into developing the economy and carrying out structural reforms in the market. Also, it’s worth considering a more proactive policy in capital account management to attract foreign investors to invest in Chinese shares.