China’s struggle for a free (stock) market
China’s stock market was conceived with an entirely different purpose than stock markets of large economies elsewhere, says Scott Kennedy, director of the Project on Chinese Business and Political Economy at the Center for Strategic and International Studies.
“The purpose of China’s stock market is to raise capital for state-owned enterprises and other privileged companies,” he says. “It is not to act as a way for investors to find highly efficient and profitable companies to put money into and provide external oversight of these companies by allowing investors to have information and voting power.”
It’s a fundamental difference in China’s stock market that he says has never been resolved since those markets were created.
The government has managed the stock market accordingly. For example, last year it promoted the idea of stock ownership as a way to diversify financial exposure away from the property market investment.
“Investors thought they were going to get a free ride from the government,” says Alan Robinson, vice president at RBC Wealth Management.
When officials then said that they were going to take their hands off the markets, people lost confidence. “And that has caused the meltdown we’ve seen over the last few sessions,” Robinson says.
At that point, the degree to which the government is willing to intervene became even more apparent — the gloves came off and it started buying stocks to prop up the market.
“The parallel would be if the U.S. Treasury or Federal Reserve stepped in to purchase the stocks of IBM or of Apple,” says Matthew Slaughter, dean of the Tuck School of Business at Dartmouth.
The government prohibited selling until the market reached 4,000 points. It threatened imprisonment for people who were “maliciously” short-selling stocks.
“The broader problem the Chinese government has created with these interventions,” says Slaughter, “is setting the expectations that stock prices can go and should go only up.” It’s particularly significant because millions of Chinese households are learning what a stock market is and how to participate in it. Part of a stock market — especially at a moment of uncertainty and reform, is volatility and downward movements.
Despite all of this, China’s stock markets have potential. Jennifer Carpenter is associate professor of finance at New York University’s Stern School of Business, and along with professor Robert Whitelaw and Fangzhou Lu recently authored a paper in which “we find that against all odds, China’s stock prices are surprisingly informative about future corporate earnings,” says Carpenter. “It’s comparable to levels of price informativeness that you see in the U.S.”
Otherwise put, China’s stock market can be a real stock market if the government would just let it.
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