Wednesday, February 10, 2016

Why China Should Just let the Stock Market Crash

Why China Should Just let the Stock Market Crash

The mainland’s securities regulator is likely to make it harder for major shareholders to sell stocks on the secondary market, as the authority seeks to avoid another punishing sell-off following sharp declines on Monday that triggered a circuit-breaker trading suspension.

It’s time again for a tale of two cities although, in fact, I don’t have to tell the tale. The two charts below tell it all for you.

Newspapers are in words business, however, and the boss won’t like it if I don’t put in some words, too. Thus:

The blue line in the first chart shows the growth of the mainland economy on an index basis where January 2000 equals 100. The red line shows you the performance of the Shanghai Composite Index on the same basis.

Here we have a stock market that shows no relation to the economy of the country in which it is located. They could be on two different planets. The economy booms mightily but the stock market just shuffles up and down a little with the occasional speculative rally and then falls back to where it was before.

Here we have a market that is clearly grounded in its economy. The two do not move absolutely in tandem but it obvious that investors generally do well when the economy does well.

Right, boss, I figure that says it all about what is happening in equities north of the border.

But, just in case anyone asks why it is that way, I shall offer my standard explanation. When governments treat investors as cows to be milked or chickens who lay golden eggs and spare no thought for the welfare of these cows or chickens, then what they eventually get is a failure on the farm.

Yes, a stock market is a mighty efficient way of raising needed capital for a growing economy but the customer still has to come first and the customer in this case is the individual investor who puts his money at risk in the stock market.

Reward him and he will reward industry with all the money it needs. In that kind of market, there is never a shortage capital. There is only ever a shortage of good ideas for the use of it. But ignore the investor and sooner or later he will exact retribution. The recent performance of the Shanghai Composite Index is an example of such retribution.

And things will only get worse with such daft remedies as telling people they may only buy stock and may not sell it or with so-called circuit breakers that stop trading.

The only workable remedy, and the authorities in Beijing will never take it, is to open the market wide, 24 hours a day with no trading restrictions, and let it fall where it may. Bargain hunters will always pick it up off the bottom.

Yes, it will hurt but that pain is coming anyway. Why prolong the agony?

Jake van der Kamp is a native of the Netherlands, a Canadian citizen, and a longtime Hong Kong resident. He started as a South China Morning Post business reporter in 1978, soon made a career change to investment analyst and returned to the newspaper in 1998 as a financial columnist.


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