Tag Archives: stock market

Time For A Poacher Turned Gamekeeper At The Exchanges?

LIU SHIYU, who has replaced the ill-starred Xiao Gang as China’s top securities regulator, is a former chairman of the Agricultural Bank of China. Liu is the China Securities Regulatory Commission’s eighth head, a job he will combine, like Xiao, with being the Party chief in the Commission. Six of Liu’s seven predecessors also worked in state banks.

And therein lies a clue to the innate contradiction in China’s attempts to control the animal spirits of financial markets by old-school administrative measures, which, like Xiao’s ‘circuit breakers’ can end up embarrassingly making matters not better but worse.

State bankers whose careers have been spent within the confines of a highly protected banking system where administrative guidance has long made the need for risk management a redundant skill are unlikely to have that gut feel for how markets work and what reinforces or undermines investor sentiment. Even Liu’s spell at the People’s Bank of China was mostly concerned with the bailout of the state banks in the early 2000s.

While having someone from the securities industry regulating the markets would no doubt come with its own mixed bag of connections and conflicts, it might be time for Beijing to consider appointing a poacher turned gamekeeper to oversee the exchanges.

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Markets Expose China’s Inherent Economic Contradiction

100 yuan notes

THE RECENT VOLATILITY in financial markets has brought into question the capacity and nerve of China’s policymakers when confronted with variables they cannot control politically. This heightens concern not so much about the gathering pace of the economic slowdown as about the country’s prospects for the next stage of the economy’s d development, ‘rebalancing’ away from export and capital investment-driven growth and towards domestic consumption.

In what was mostly a closed economy, policymakers had relatively few monetary and fiscal levers to pull, but they were effective when yanked. Administrative guidance was particularly efficient. As the financial system has been opened up, the less guidable animal spirits of market forces have come more destabilisingly into play. The new tools to control them have arrived piecemeal, an inevitable consequence of the deliberately measured pace of financial-sector liberalization.

The currency has been in the vanguard of the reforms in lockstep with freer capital flows, moving steadily along the path of full convertibility, whose final destination has allowed the yuan to achieve the accolade of inclusion in the International Monetary Fund’s basket of reserve currencies.

The People’s Bank of China has a deserved reputation in financial circles around the world for the high calibre of its officials. But even their competency has been questioned following their uneasy and unexpected guided devaluation of recent weeks and their attempts to bring the tightly managed onshore and market-driven offshore exchange rates into alignment, a move undertaken for SDR-related reasons as much as currency management, but done with a tin ear for timing.

The central bank’s switch to managing the yuan’s value against a basket of currencies was both poorly signaled and sent mixed signals to investors, who tend to focus on the exchange rate against the dollar.  If investors lose confidence in the central bank’s effectiveness in the execution of monetary policy, it will only feed the volatility of the equity markets, where officials have already revealed a far from sure touch in their attempts to stabilize the markets.

While it may be virgin territory for many of them, policymakers clearly miscalculated the linkage between tumbling equity prices and speculative pressure on the currency, and how quickly the currency would become the focal point of market unease about China’s economic prospects among investors. It also says something about how the world has changed that the competency of Chinese policymakers has supplanted U.S. monetary policy as the primary determinant of global investor sentiment.

It is the nature of financial markets to be volatile in greater or less degree. Policymakers will learn by experience the limits of their reach in such an environment. Three decades of history will have left them more naturally inclined to intervene than not, which will make that learning painful and slow — last summer’s lessons from the mishandling of the stock-market plunge were clearly not well learned this most recent time round.

However, the broader concern to this Bystander is that financial-market turbulence will encourage Beijing to backslide on further financial-sector reform and more broadly on rebalancing. For some months, it has been dialing back on talking up the need to reduce government intervention in the economy. The third Party plenum at which the top leadership pledged to give market competition a decisive role in the economy seems longer ago than the 30 months it was.

Similarly, the notions that powerful bureaucrats can be a panacea for all economic ills and that the state can trump the market are fading. With that will come doubts in the some senior minds that the Party can pull off the unprecedented trick of liberalizing China’s economy without doing the same to its political system, unacceptable to the Party though the later is.

The certainty that state control provides versus the benefits that free markets bring is the inherent contradiction that may have been manageable for the past 30 years of the economy’s modernization but which, as Japan and South Korea have shown on a smaller scale, becomes more not less contradictory as an economy advances and becomes too big and complex to answer to political imperatives — and to the bureaucrats imposing them.

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The Big China Market Crash In Little Stocks

A 30% DECLINE in the Shanghai bourse’s Composite Index? Pish! The Chinese market that has taken the heavy pounding is the over-the-counter National Equities Exchange and Quotations (NEEQ).

The Beijing-based ‘third board’ soared higher and fell further than its senior brethren in Shanghai. Prices of NEEQ-listed companies more than doubled between early February and early April before giving up four-fifths of that gain by early this month.

NEEQ was launched as a trial in 2006 to provide a way for tech start-ups in science parks to gain access to a source of finance that wasn’t state-owned banks. Its remit was gradually broadened. At the end of 2013, the market was opened to any innovative company from any of the seven designated strategic sectors that it is hoped will tilt the next phase of China’s economy towards domestic consumption, such as healthcare, media and tourism.

Ease of listing has attracted more than 2,500 companies. Last year, initial offerings raised 13.2 billion yuan ($2.1 billion) of capital for such businesses.

As with the first and second (Shenzhen’s Nasdaq-like ChiNext) boards, investment money, including from new mutual funds, poured in the early part of the year, pushing valuations way out of line with fundamentals. That was only exacerbated by the relative thinness of trading. The Shanghai exchange turns over — or at least was turning over — 10 times the trade in a day as NEEQ is likely to do in a year.

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Government Intervening To Prop Up Shanghai Stock Prices

With the Shanghai stock exchange’s bench mark index having fallen earlier this week to 50% of its all time high, the regulators have cut stamp duty on share trading from 0.3% to 0.1%.

The announcement, not a surprise though the timing was unexpected, sent share prices soaring. The Shanghai Composite Index closed Thursday’s trading up 9.3%, its largest one day rise since the introduction of daily trading limits in 2001. Trading volume was double Wednesday’s and the highest of the year.

Xinhua‘s report suggests an intention on the part of the authorities to bolster market sentiment, especially among retail investors, at a time when rising energy and food prices are putting inflationary pressures on the economy. On Sunday, the authorities had announced new rules that make it more difficult for large blocks of shares to come to market, seen as an other official attempt to underpin prices.

Stamp tax on share transactions was tripled last May in an attempt to do the reverse – rein in a frenzied market. But that was then.

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At Least The Stock Fund Freeze Is Thawing

Such are the vagaries of administering markets. Five months ago, China’s securities regulators banned new stock funds in an effort to take some air out of
Shanghai’s stock bubble. Now they are allowing them again in a effort to break the fall in stock prices.

Two new closed-end funds will raise 14 billion yuan between them and will launch after lunar New Year, Shanghai Securities News reports, here via AFX. In all, Chinese funds have 3.2 trillion yuan ($445 billion) under management, more than double their assets in 2006, according to Xinhua.

The benchmark Shanghai Composite Index had doubled in the year before the China Securities Regulatory Commission imposed the fund freeze. It has fallen 30% since.

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