Friday, July 31, 2015

Trying to manage the bear . . . an exercise in futility


We've discussed before how the Chinese government has attempted to, in so many words, 'take over' that country's stock markets and 'manage' the economic crisis affecting them - to no avail.  The Economist sums up why those measures haven't worked.

Why is China finding it so hard to save its stockmarket?

The short answer is that, for all the government's involvement, China's stockmarket is still a market, and there are now more sellers than buyers ... Had China's stockmarket been allowed to crash, shares would have eventually found a floor. Instead, regulators have tried to erect a floor, and investors are not sure whether it really is the low point or just another artificial bottom susceptible to collapse.

The intervention has also created new problems. By wading in so heavily, the fate of stocks now sits in the hands of officials.

. . .

Even if the government does manage to withdraw its support without causing share prices to crash, the long-term damage to China's stockmarket will be severe. At the height of the sell-off, just over half of companies suspended their shares from trading, hoping to avoid the rout. Although most have now returned to the market, the message to investors is clear: if you put your money into risky stocks, you might find them frozen at a time of crisis, just when you need to cash out. What's more, regulators have halted initial public offerings, trying to limit the supply of shares and push up the prices of those already listed on the market. Past experience suggests it could be months before they lift the ban and let companies issue new shares. Add it all up, and China is left with a stockmarket in which investors take their cues from the government. Rather than bothering to assess the value of companies, they are betting on what regulators will do next.

There's more at the link.  Bold, underlined text is my emphasis.

I think the last two sentences say it all.  By intervening in a nominally 'free' market, the Chinese government has demonstrated conclusively that it isn't 'free' at all.  That means people are no longer chasing profits.  They're chasing government edicts, and taking bets with their investments on what the next edict will be.  I imagine the potential for bribery among the officials responsible - "How much for a hint about your next decision?  Please?  Pretty please with dollars on it?" - must be on an absolutely epic scale . . .

Peter

5 comments:

Anonymous said...

"Add it all up, and China is left with a stockmarket in which investors take their cues from the government. Rather than bothering to assess the value of companies, they are betting on what regulators will do next."
^ So primitive.

Instead, they need a system where investors hang on every word of a federal reserve chairman.

Right?

genericviews said...

I suspect all the investors are equally suspicious that their role of "investor" is to give their money to the insiders with political connections. A rigged market is always rigged to benefit someone, not for everyone's common good. If I am in a market and not allowed to dump by worthless shares before everyone else knows they are worthless, then I have to suspect the price is being maintained while someone else dumps their worthless shares ... at my expense.

That's why stock markets are not investing. They are gambling. Insiders win again.

Rooted in Him said...

Given the level of cronyism in the Chinese economy, most of the big investors are probably deeply connected to the corrupt Politburo. No one wants to see their wealth evoporate in a market crash. The investors are probably working their connections frantically.

A real crash will hurt the elite very badly either directy or indirectly.

Divemedic said...

When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.

P. J. O'Rourke

Tom Bridgeland said...

What interests me is that the government is ending up as the actual owner of many of these firms. Communism II, in effect! Go back in the Bible and read about how Pharaoh ended up the prime landowner in Egypt. During the seven years of famine, he traded Joseph's stored food for the Egyptian people's land, and at the end of it owned practically everything. All the peasants were not just his subjects, but also his tenants. Be very interesting to see how this plays out. In the past, the Chinese people would put up with just so much incompetence, and then rebel and create a new dynasty of emperors.