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For example, the People’s Bank of China shifted its monetary policy, withdrawing currency from circulation and sending signals that liquidity would remain moderate in the second half of the year; meanwhile the China Securities Regulatory Commission approved a great number of securities and mobilized nearly 100 billion yuan (US$14.6 billion) to the battlefront to stabilize the market ahead of National Day.
The China Banking Regulatory Commission also announced it would allow the establishment of consumer finance companies – financial institutions that make small loans to individuals – in order to stimulate individual consumption, build sound financial networks and boost economic growth.
Somehow, I do not feel thrilled to hear that all these official bodies are lending a hand to the stock market, bringing in huge amounts of capital to ensure a good performance for the national anniversary. Rather I feel worried about the country’s stock market.
Chinese banks lent an amazing 7,370 billion yuan (US$1.07 billion) in the first half of this year. It is a huge increase over last year; this cannot be described as “moderate liquidity.” Instead, the policy seems to be to allow extremely high liquidity. The huge amount of cash poured into the market is surely causing tremendous inflationary pressure as well as generating high numbers of non-performing loans for Chinese banks.
It may have been necessary to make some slight adjustments in monetary policy to generate cash flow, but now, for the sake of good stock market performance for National Day, a slightly tight fist has been opened wide.
Now that the securities regulatory authority has opened wide its gate, a single company has been able to get approval for two securities within one day, which never happened before. Although these measures could temporarily flood the stock market with capital, this kind of stimulation is unsustainable.
Certainly, heating up the stock market could improve investors’ confidence and attract more private funds. Then the market would no long need to rely on credit funds; perhaps this is the management’s “wishful thinking.” But could such government-orchestrated “good performance” truly restore investors’ confidence?
This reminds me of the so-called “good performance” prior to the 17th National Congress of the Chinese Communist Party two years ago. At that time, all kinds of special policies were announced, and the stock market was full of optimism. But after hitting a historical high, stock prices dropped dramatically on the second day of the Congress.
This was understandable. The government’s purpose in strategically supporting the stock market was to pay tribute to the 17th National Congress; once the meeting opened, intervention in the following days was out of consideration. Chinese shareholders quickly got the picture; they didn’t wait till the close of the Congress. As soon as the beneficial policies expired, the investors all withdrew. A huge collapse then was inevitable.
Stabilization is a long-term concept; maintaining a stable market in the long term requires sustainable policies.
In addition, the stock market is supposed to follow market principles. Those who supervise it should follow market rules and maintain independence. Economic policies should not be based on political objectives, and market prices should not be manipulated as a political “gift.” Such political “tribute” could bring short-term prosperity, but it could also create long-term hidden troubles.
The reality is that China’s stock market is still not free of the odd phenomenon of being policy driven, and this is the biggest factor creating instability in the market.
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(Sheng Dalin is a well-known writer and media critic, based in Zhengzhou, Henan province, China. This article is translated and edited from the Chinese by UPI Asia.com; the original can be found at http://blog.sina.com.cn/s/blog_53e839d20100ewb8.html ©Copyright Sheng Dalin.)
