Should the govt save the share market? No

Sina.com, together with Securities Times and a stockbrokerage firm, has opened a forum inviting comments on "what can be deployed to save the Chinese stock market". The author of the comment judged to be the best can win a new iPhone.

We can't be sure what criteria will be applied in the selection of prize winners among the hundreds of entries. You can go to http://finance.sina.com.cn/focus/2012stock/ to take a look.

From what we have read, there is one theme common among the many different proposals and that is: only one person can save the stock market. And I guess everybody can guess who. It's the government, of course.

But nobody can agree on what the government should do if it finds the market needs to be saved. We don't think it does. I'll get to that later.

Some commentators in the forum argue passionately for greater official intervention, short of directly investing public funds in the market to lift share prices. Their prescriptions range from slapping a moratorium on new share issues, which are deemed to have siphoned off liquidity from the market, to culling the perennial underperformers from the board.

Others trace the root of the problem to too much government intervention, contending that the highly restrictive rules and regulations are inhibiting the functioning of the market by distorting free market forces. "Return the market to the people," one commentator thunders, calling official intervention a disease that is sapping the life out of the market.

To the multitude of investors, who bet their savings often on rumors and hearsays, the Chinese stock market is indeed seriously ill. Crashing from the height of more than 6,000 in late 2007, the Shanghai Composite Index, the most widely watched indicator, plunged below 2,100 last Monday. What has irked investors most is that while other major stock markets were recovering blithely, the Shanghai and Shenzhen bourses remained stubbornly mired in the doldrums, showing no signs of picking up anytime soon.

In some respects, the Chinese stock market is a lot less healthy than it should have been. Shortcomings in enforcement are widely blamed for the proliferation of malpractices, including insider trading, disclosure of deceptive information and even irregular accounting. But such inconsistencies were just as rampant, if not more so, during the pre-2008 stock market boom. For that reason, whatever bearing they may have on the market's overall performance has remained doubtful.

To be sure, tighter enforcement of the securities regulations is always good for the stock market. But it is a long process whose effect on the market is expected to be slow and incremental. Although the securities watchdog has said more than once in the past several months that it would greatly step up its enforcement efforts, few investors are expecting miracles at least in the short term.

The real question to ask at this point is: Is the stock market in need of being saved? The answer is "no" if you agree that the market is merely reflecting investors' confidence in the prospects of listed companies.

A stock market needs to be saved only when it is under attack by a group, or groups, of speculators bent on profiteering by unduly manipulating key economic factors that affect share prices.

A vivid example was set by the hedge funds which mounted an attack on the Hong Kong dollar shortly after the outbreak of the Asian financial crisis in 1997. Their concerted attack pushed up the interest rates, which, in turn, depressed share prices, enabling them to make a killing in shorting index futures. Such attacks forced the Hong Kong government to take defensive action by buying index constituent stocks worth more than HK$100 billion.

The Chinese stock market is under no such attack. In fact, there has never been any unusually sharp swing in share prices. The fall in share prices since early this year has been consistent and gradual. Rather than waiting for salvation, it is sending a message to corporate managements that investors aren't happy with the way they run their businesses.

(China Daily 09/24/2012 page8)