COMMENTARY: Should Beijing Intervene to Prop Up Stock Market? Experience Says No
The government’s activist role in the 2015 meltdown caused a loss of confidence and market credibility. Debate reflects the larger issue of economic meddling.
One would think they learned last time. In the summer of 2015, the bottom fell out of a spectacular bull market that had seen the Shanghai Composite Index soar 149 percent over a year-long period that ended June 12. Starting that day, the two main exchanges would go on to lose over 40 percent of their value over about two months.
It put a shattering end to a feel-good attitude that China's economy had nowhere to go but up as the Shanghai Composite rose to more than 5,000 points. Investors were jolted, consumers lost confidence, and Beijing's leaders took actions that would never be condoned in the West.
Calling the crash "an irrational selloff," the Securities Finance Corporation encouraged 21 brokerage firms to buy blue-chip stocks directly, in part by loaning them $42 billion. They allowed half of the companies on the Shanghai and Shenzhen exchanges to halt trading for days or weeks at a time. Controlling shareholders and board members were prohibited from selling their stocks in the open market for six months. A moratorium was put on IPOs. Investors were given more leeway to buy on margin.
The government also undertook economic stimulus measures, and for many months the Xinhua news agency, the Communist Party mouthpiece, wrote a series of commentaries promoting the stock market.
And basically, none of it worked. Instead, these moves created a loss of confidence in the markets. They revealed a fragility and demonstrated that the government would come rushing to the rescue at the first real sign of trouble. Investors knew that was not how real markets worked, and many of them fled the market.
The markets have gone through various fits and starts since, and for a while (well after the futile intervention measures) the Shanghai Composite built back up into the mid-3000s.
A Repeat of the Past?
Flash forward to today, and China's stock markets again are reeling, with the Shanghai Composite currently sitting at 2,554. Authorities are considering directing the People's Bank of China - the nation's central bank – to start making direct purchases to shore up the market. The subject has been a matter of heated debate among financial analysts, brokerage houses, and regulators for the past few days.
Brokerage houses, including Dongxing Securities, CITIC Securities, and Nomura Holdings, argue in favor of intervention. They cite the case of Japan, which rolled out direct ETF purchases years ago as part of its monetary policy. Senior researchers at the brokerages claim the action would stabilize the market, which in turn would boost confidence and stimulate the economy.
Nomura's Asian research department argues that central bank stock purchases should be an important domestic policy tool, predicting that the PBoC will start buying stocks sometime in 2019, according to the Chinese-language Caijing news portal. It even makes the claim that such intervention would do a better job at stimulating domestic consumption than China's highly touted bullet trains.
On the other side, opponents argue that the Bank of Japan's policy is controversial and really hasn't worked out so well. Regulators and many others also say the stock market does not correlate at all strongly with economic performance. And they point out the PBoC might lack the legal authority to buy stocks directly.
A large group of researchers in Beijing told the Chinese-language Securities Times that direct purchases by the bank are likely to increase market volatility, not tame it.
Waiting to See
"It's highly unlikely that the PBoC will undertake this policy," the Beijing-based Trivium economic research firm wrote in a note this week. "A small minority of folks are arguing for it, and they are self-interested – the stock market slump has really hurt liquidity at securities brokerages."
Nevertheless, Trivium says, "the debate has captured the attention of financial officials throughout China – highlighting both increased anxiety around the economy and the search for new, perhaps unconventional, policy solutions."
In the end, the debate pits Beijing's desire for free markets dictated by economic conditions against the Communist Party's penchant to intervene when events don't go as planned.
And that, in turn, is a pretty strong reflection of the greater tug-of-war taking place among China's economic planners. Reformists want to move faster to open up the economy, foster competition, and let some of the inefficient state-owned enterprises fall by the wayside. Conservatives favor the slow, cautious, heavy-handed approach that largely has won out over the past four years.
Who wins this war for the future will go a long way in determining not only how much the government intervenes in the stock market but the overall direction and character of China's economy.