Blind faith in China's stock mar­ket

The Pak Banker - - OPINION - Yu Hua

In late June, as the Chi­nese stock mar­ket was in a tail­spin, a joke be­gan mak­ing the rounds. "We played the mar­ket when we thought stocks had hit rock bot­tom," one in­vestor says to another, "only to find there was a base­ment be­low. We played the mar­ket when prices were in the base­ment, only to find there was a cel­lar un­der­neath that, and when we kept play­ing in the cel­lar, we found that be­low that there was hell. Then we took our lives in our hands and kept play­ing when stocks were in hell - only to dis­cover it's true what they say: There are 18 lev­els of hell!"

For the of­fi­cials of China's Se­cu­ri­ties Reg­u­la­tory Com­mis­sion, July 4 must have seemed like hell on earth: They were as fran­tic as ants on a hot wok. That morn­ing, the heads of 21 top bro­ker­ages met with the reg­u­la­tory com­mis­sion, and, ac­cord­ing to media re­ports, agreed to sup­ply some 120 bil­lion ren­minbi, or $19.4 bil­lion, to a mar­ket res­cue fund.

The plan was in clear vi­o­la­tion of the Se­cu­ri­ties Law. Bro­kers need ap­proval from their share­hold­ers to give up so much money. But with the reg­u­la­tory agency des­per­ate for a cash in­fu­sion, the bro­kers were in no mood to fol­low the law. We Chi­nese are used to this kind of thing: In China, law and the rule of law are a world apart.

Many peo­ple think the stock mar­ket plunge, which con­tin­ued this week, had its ori­gin in the gov­ern­ment clam­p­down on mar­gin trad­ing, the use of bor­rowed money to buy stocks, which had led to a fever­ish ex­pan­sion of bro­ker fi­nanc­ing and to the stock mar­ket bub­ble. Bro­kers are re­quired to back trades with the equiv­a­lent amount of cash from a client, but com­pe­ti­tion and a thriv­ing stock mar­ket had led too many to flout the rules. Ev­ery day in­vestors com­plained to bro­kers that the fi­nan­cial thresh­old for trad­ing was too high. The bro­ker­ages felt they had no choice but to ease the cash re­quire­ments for mak­ing trades.

As the mar­ket boomed, more and more or­di­nary peo­ple in­vested their sav­ings and fun­neled bor­rowed money into stocks. The vir­tual econ­omy of the mar­kets de­tached it­self from eco­nomic fun­da­men­tals, and stock prices of listed com­pa­nies be­came dis­con­nected from their real value. It was as though in­vestors were spend­ing 100 yuan to buy a 1 yuan pair of chop­sticks.

When you re­al­ize that there are some 100 mil­lion in­vestors in China's stock mar­ket, and when you think, too, of the throngs of gam­bling-lov­ing Chi­nese pack­ing the world's casi­nos, along with the clat­ter of mahjong tiles in­side prac­ti­cally ev­ery Chi­nese home (they say that when you're on a plane and hear peo­ple shuf­fling mahjong tiles be­low, you know you're over China), then it is clear that for many Chi­nese the stock mar­ket sim­ply whets a thirst for a quick profit. The gov­ern­ment was keen to see peo­ple move money from sav­ings - some Chi­nese put away as much as half of their in­come - into cap­i­tal mar­kets and thus stim­u­late an in­creas­ingly slug­gish econ­omy.

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