China took more than a few slings and arrows for its aggressive intervention in the stock market to prop up prices this month. Some analysts were scathing in their criticism — one TV commentator in New York said Beijing’s regulators had effectively “criminalized selling” while another foreign analyst used a Vietnam war era description, saying regulators seemed convinced they needed to destroy the market in order to save it.
On Monday, China’s regulators struck back.
A lengthy commentary in the official People’s Daily maintained that the official support was necessary to prevent a stock market disaster and that regulators in other countries had used similarly strong measures to head off potential market meltdowns.
“Facing a stock market disaster, any market regulator would intervene directly or indirectly,” read a headline in the paper that describes itself as the Communist Party’s official mouthpiece.
“When a market malfunctions, the government should not let market sentiment turn from bad to worse. It should use powerful measures to strengthen market confidence,” the newspaper said.
The commentary cited analysts who pointed to the Hong Kong market in the midst of the 1997-1998 Asian financial crisis – when the territory’s government bought shares and index futures to stave off speculative selling. That move – like Beijing’s intervention — was widely criticized initially. Ultimately it succeeded in stabilizing the market. The People’s Daily also said the U.S. had learned lessons from the stock market crash of 1929 and noted it too had adopted aggressive measures in times of crisis in 1987 and 2008. Japan had also stepped in to give the market a helping hand when faced with an emergency.
Many of the measures taken by Chinese regulators were hardly controversial at all.
In late June, the People’s Bank of China cut interest rates and then quickly followed the move by injecting liquidity to support the market.
China formed a war chest to buy stocks as the China Securities Finance Corp., set up in 2011 to support margin financing by securities companies, set aside 260 billion yuan ($ 41.8 billion) to lend to brokerages to finance stock purchases.
In somewhat more controversial moves, authorities restricted initial public offerings, called on company founders not to sell shares and launched an investigation into alleged “malicious short selling.”
Authorities also allowed a suspension of trading in more than 1,400 stocks while the insurance regulator let insurers use more of their premium income to buy shares. Meanwhile, new hurdles to short selling of index futures were put in place.
Some analysts shared the newspaper’s positive assessment of some of the government’s measures, noting that market support such as central bank liquidity injections, fiscal assistance and even restrictions on short selling were all acceptable measures used elsewhere.
“I don’t think the intervention was overdone,” said Zhu Zhenxin, analyst at Minsheng Securities. “There really wasn’t any alternative. There was a potential for this to spill over to the banking system.”
But Andrew Polk, an economist at the Conference Board, was less sympathetic.
Mr. Polk joined other analysts in questioning whether it was really a potential systemic crisis when the government intervened. The Shanghai Composite Index was once down about 32% from its peak reached on June 12, but even then it was well in positive territory compared with where it was before the rally began. It’s now up 94% from a year ago.
“This intervention has been likened to a pyrrhic victory – but it’s not clear it was a victory,” Mr. Polk said.
“The market intervention was not so much about heading off a crisis. It seemed to be more about proving the government’s policy-making prowess,” he said.
The newspaper commentary did not address what many find most worrisome – that regulators stood by and watched as credit poured into the stock market, fueling a prolonged advance that ultimately came undone. The newspaper also had nothing to say about the official media appearing to act as a cheerleader for the market — and the government — when things were going well.
Wendy Liu, head of China equity research at Nomura, said that one thing is certain — the volatility left offshore investors feeling “shell-shocked.”
“They (China’s market regulators) need to move away from a policy market,” she said. She added that the market’s wild ride might set the stage for some policy revisions.
“It might be an opportunity,” she said. “I am hopeful.”
–William Kazer. Follow him on Twitter @WKazer.
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