According to prime minister Wen Jiabao, one of the Chinese government’s two economic goals is “a healthy and sustainable capital market.” It’s easier said than done.
In 2007, the Shanghai stock market was unhealthy with an unsustainable fever. The index had risen six-fold in just two years.
US central bankers say it’s impossible to identify bubbles in asset prices before they pop. But the Beijing authorities seemed to have clearer vision. They saw if nothing was done to restrain enthusiasm among new investors in this flawed get-rich-quick scheme, the political price extracted by disappointed investors would be high.
So, they put on the brakes. Higher interest rates, bank reserve requirements and share transaction taxes turned the stock market momentum from sharply positive to just as sharply negative. The Shanghai index has been cut in half in just six months.
In Beijing, the pace of the drop looks unhealthy and unsustainable — especially just before the planned Olympic display of universal Chinese national happiness. In response, the authorities have turned up the gas.
The transaction tax has been cut back, and there is a talk of allowing investors to borrow money to help finance their share purchases. It was enough to bring the market up by 15% in a week. Of course, if the Chinese government ever did allow margin trading, the likely result would be another, even larger bubble.
As the US Federal Reserve knows, it’s hard to fine-tune the management of any stock market. The difficulty is even greater for Shanghai, which is new, illiquid and relatively small. Communists used to point out that total central planning eliminated the pain caused by market gyrations. The Shanghai jolts might make some bureaucrats in Beijing long for the old system. If so, they should remember how much central planning obstructs Wen’s other economic goal: “stable and fairly quick economic development.”
China’s stock market regulator cut the tax on making trades on mainland stock exchanges from 0.3% to 0.1% on 23 April. The announcement effectively reversed a decision in May 2007 when the government tripled the tax to limit speculation. The Shanghai Composite Index surged 9.3% on 24 April, the largest daily gain in for over six years. As of 22 April, it had fallen by 50% in 2008 from an all-time high reached in October 2007.
On 20 April, the government placed restrictions on sales of shares by controlling investors in listed companies. Shareholders seeking to sell more than 1% of a company’s equity would have to do so off-market through block trades. This was a response to fears over large new share issues flooding the market.