China's policy-makers must step in to prevent panic in stock market

With the benchmark Shanghai Composite Index closing at 3,686.92 points on Friday, the Chinese stock market has plummeted by nearly 29 per cent over the past three weeks. This decline is in sharp contrast to a year of spectacular gains that inflated its total value to more than $10 trillion in June, roughly the size of the country’s gross domestic product in 2014.

Given the huge size of the Chinese stock market, it is more than obvious that the country’s securities watchdog must take action to prevent an overdue market correction from spiraling out of control and causing irremediable damage to not only the stock market but also the real economy.

Since the People’s Bank of China cut interest rates last weekend the Chinese authorities have come up with a slew of measures that are apparently meant to bolster sentiments in order to arrest the steep fall of the stock market from its periodical peak on June 12.

Some measures like the plan to allow the country’s pension fund to invest in equities is of long-term significance to the healthy expansion of the stock market. Other measures like relaxing collateral rules on margin lending and efforts to crack down on stock market manipulation are supposed to deliver immediate results and help arrest the decline.

Unfortunately, the slide of the stock market over the past week indicates that investors have not yet responded well to these positive developments.

Explanations abound for the continuous decline of shares. Some observers say the ridiculously high prices of shares, especially those of some newly listed high-tech companies, which even their founders cannot resist cashing in on, are to blame.

Others have blamed poorly regulated margin lending as the root cause of the recent stock boom and the ongoing bust. Leveraged stock investment through grey-market or official-margin lending has substantially increased the risk of a snowball effect with their borrowers being forced to liquidate their positions when the shares started dipping.

Still others attribute the bust to blind optimism fuelled by the surge of retail investors into the market. It was reported that the number of trading accounts holding at least some stocks hit 68 million by the end of May, up 27 percent year-on-year. And a few even believed the rumours that foreign capital was maliciously attacking the Chinese market.

Admittedly, it will be almost impossible to identify the exact reason for the stock bubble. But that does not mean policy-makers can wait out this stock storm.

The year-long surge of shares has a lot to do with most investors’ belief in the Chinese government’s vow to transform the country’s growth model through reforms and innovation during which the stock market will play a central role. 

Therefore, the policy-makers have to take resolute measures to prevent stock panic. The failure of expedient policies to boost the market in the past days should serve as a warning against confusing and piecemeal measures that would only wear thin investors’ confidence.

Now is the time for the policymakers to take effective steps to eliminate too much risk-taking to develop a booming stock market for innovation-led economic transformation.