Chinese investors want market manipulation as in U.S.

China In Too Deep to Gloat Over Subprime

By Geoff Dyer
Financial Times, London
Friday, April 4, 2008

http://www.ft.com/cms/s/0/85afebc8-0258-11dd-9388-000077b07658.html

SHANGHAI -- Given all the financial troubles that the US is facing, you might expect the Chinese authorities to indulge in a spot of schadenfreude. Having sat through all those lectures about the need to liberalise financial markets and the importance of letting foreign investment banks do their stuff on Chinese turf, a certain amount of quiet satisfaction might be in order.

Indeed, as one Chinese official put it the other day: "The subprime market is very complicated. Chinese banks are not nearly sophisticated enough to make those sorts of mistakes."

Yet the Chinese are not being given much time to enjoy the moment. With the mainland stockmarket down not far short of 50 per cent from its peak in the autumn, the government is under huge pressure from the investing public to stop the rot. Chinese investors have watched Fed chairman Ben Bernanke bend over backwards to stem the damage in US financial markets and want to know why their government is not doing the same.

"The US government is hyperactive, but China watches our money get wiped out and does nothing," one investor wrote on Friday on eastmoney.com, a popular stocks chatroom.

There have not yet been any large protests by disgruntled investors but the demands have been rising -- and not just in chatrooms. At last month’s meeting in Beijing of the National People’s Congress, China's legislature, the slump in the market was a major talking point. Given that plenty of government officials took part in the day-trading frenzy that gripped China last year, the meeting was an excellent chance for a quiet word.

On one level, this criticism is unfair to all parties. Mr Bernanke has unleashed the Fed's many weapons not to prop up the S&P 500 (one hopes) but to prevent a meltdown of the entire financial system. And anyone who bought Chinese shares last autumn when they were on a price-earnings ratio of nearly 60, should have little cause for complaint now.

Yet the market in China is still gripped with the idea that the government has the means to kick off a new bull market, if only it can find the will.

Analysts sometimes like to refer to the mainland market as being "policy-driven," which is a polite way of saying that the government has a huge influence over the short-term direction of share prices. Amongst ordinary investors, there is an almost fatalistic belief that the government is pulling the strings of movements in share prices. How else to explain the widespread opinion -- until a few months ago, at least -- that the authorities would not let the market fall sharply in the months before the Olympics.

Government officials claim to be frustrated by the mythical power they are supposed to have. They say that they have launched reforms in recent years to build a more mature and stable market. And even when they have baulked at introducing new measures, they say this is because they are afraid of encouraging more speculative and rash behaviour.

So while the government is putting in place plans to allow trading of stock index futures, the final approval has not yet arrived because officials are afraid it will lead to an orgy of speculative investments -- as well as SocGen style trading scandals. Similarly, margin trading has yet to get the nod because of fears that investors will abuse the potential for leverage. Prudence and patience have been the buzzwords, officials say, at a time when tempers have been running high.

Yet that is only one side of the story. The reason why so many investors are obsessed with the government is that officials cannot stop themselves from intervening in the market to try and gerrymander the level of the stock index. The urge to micro-manage is too strong.

Last year, when the market was soaring last spring and millions of Chinese were opening new trading accounts, the government tried to end the party by tripling the stamp duty on each share trade. When that did not work, a slew of new initial public offerings were given the go-ahead, in order to flood the market with new paper. Indeed, the authorities jealously guard the right to approve or reject new listings precisely so that they can control the supply of paper coming onto the market.

The result is that now, with share prices in a tailspin, the market is awash with rumours about new government measures to boost the index. Share prices have rallied and then dropped in recent days over speculation about a cut in the stamp duty on share trading. Every day brings a new report about government plans.

Officials like to think that these policy tools are a way of preventing wild excesses in the market. But the result is that investors often pay less attention to the companies and more to forecasting the winds from Beijing. "Policy-driven" markets thrive on rumour, not earnings.

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