Home > Uncategorized > 陈平:对西方模式的迷恋导致了这次股灾/ On the stock crash in China

陈平:对西方模式的迷恋导致了这次股灾/ On the stock crash in China

Recently the Shanghai stock market index went from around 2,000 to 5,100, and now crash back to 3.900. There were talks and actions on how to stabilize the market, from the cutting of transition cost to possible entering of Social Security fund, from blaming of shorts, derivatives, and future trading, to foreign hedge funds. There were suicides and rumors of suicides pressuring government to save the stock market. I think this article by Chen Ping on guancha.cn is very instructive and timely. When I was reading that article it was momentarily deleted. so I am not sure readers can access it now. I am just going to summarize his views here.
Professor Chen is from Beijing University, he criticize the dominant economic theory prevalent in China at present that worshipping the traditional Capitalism theory of Adam Smith, on the invisible hand of market, while marginalize not only Marxist economic theory, but also Keynes and other theories. He says that the market is not free, experiences from the depression to various Wall Street crashes demonstrated the free market is an illusion, and if Chinese government try to save the market by pushing Social Security fund to the stock market will only damage the real economy. He advocate trying to stop the spreading psychological panic by if necessarily close the stock market for a short period to break the emotional panic. He advocated increase rather than reduce the transactional cost of trading, increase margin requirement, especially when the market was jumping and in bubble. Restrict insiders from selling for longer tie up period. Install short term trading taxes and lower long term capital gain taxes to encourage long term capital formation. Party appoint not only not corrupt officials, but the best as they did in the space program for the markets.
Having live in N.Y. for a while, I myself have some though negative experiences with the stock market. I think the economic reform in China for the last 40 years did engender a worshipful attitude, from all those business books on sale in the book stores, to the gambling, and greed of stock market trading. Xi Jinping recently emphasize that all officials will be lifetime responsible for their actions, including environmental degradation. This market crash actually will be positive if China learns lessons from it and continue to improve.

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  1. July 6th, 2015 at 11:19 | #1

    China’s stock market “crash” is a good thing. Any stock market that goes up 30% in less than a year is a bubble. The Shanghai index staying at 3500 is stable. However, I believe it will stay closer to 4000 at years end.

    Contrary to most belief, the govnt prefer to burst the bubble before it gets too big, they have done it in 2007. They have also put extremely strict measures to cool the property market (the toughest in the world). Although, in some places the property has cooled too much and they introduce secondary measures to stabilize it.

  2. Black Pheonix
    July 6th, 2015 at 12:44 | #2

    Some in the West have compared this bubble in Chinese stock market to the “dot-com” bubble.

    I believe this comparison is accurate, at least in the part that the recent rapid rise was mostly due to IPO’s, similar to the Dot-com bubble. So many Chinese speculated in the IPO’s, they had no idea what they were buying, but they still believed that they could make money in it.

    The main difference is, unlike the US Dot-com bubble, many of the Chinese IPO’s are really big established companies that are IPO’ed, compared to the US IPO’s back in the 1990’s, which had no histories and were pretty much all fantasy companies with no assets.

    In the Dot-com bubble, many of the IPO companies basically got wiped out in the end. Whereas the Chinese IPO companies today are likely to survive, even after the crash.

    Thus, there is a necessity in China to protect these established companies from being run down by the rampant speculation.

    The recent policies to stabilize the market is rational, at least to that end. It is not merely to artificially pump up the market to keep it afloat, but rather to protect established companies and the Chinese workers.

  3. July 6th, 2015 at 17:16 | #3

    Westerners are always trying to look at China through their narrow perspective. The best that they can come up with is comparing it to the dot-com crash of 2000. However, as you have noticed, China’s stock market is not the same as the US, and is simply going through a regular year. Although this year’s IPOs have raised more fund than any economy, it is just the beginning for China. Most IPOs are solid company that has gone through increasingly stringent requirement. However, there are three uniquely Chinese reasons for the roller coaster ride of China’s stock market.

    1. Easily around 1/5 of Chinese companies listed are smaller family controlled entities. Most of these companies were listed from the 1990s. They make good profit but pay paltry dividend.

    2. Chinese citizens now have excess of over $10 trillion dollars of saving in Chinese banks. The largest in the world.

    3. Close to half the market capitalization are state controlled. China’s central govnt, provincial, county even village communes run enterprises! This is the part of the market that rarely moved.

    Reason 1 allows China’s stock price to be easily manipulated. As saving account in China pays only 3% interest, many Chinese have no venue for higher return investment. To keep up with inflation, the Chinese family with disposable income invested in property. China’s stock market actually is the worse performing of any major economy for the last two decades or so because every time it has a bull run, the sharks would cash out and the govnt would do nothing. The sharks are those millionaires who owned the 1/5 and also speculate on everything, from garlic to gold.

    Reason 2 is the reason China’s stock market would have a steep bull run and than dropped 20-30% and stay flat for easily 7-10 years. Everybody (actually 1 in 10 adults) would buy on rumour and sell on rumour. And if you add in the sharks it makes the market very volatile. The investors have lots of liquidity but most don’t stay.

    Even if the govnt announced they are investing in the market, they will only invest in state owned enterprises, so if you owned other stocks, you are out of luck. The sharks however will buy stocks with potential when they feel they are low enough. The reason the stock market won’t collapse is because state fund owned nearly half the capitalization, if all private players cashed out the Shanghai index would still be at around 2000. Reason 3 means that the investors and speculators alike get to run the market up and down anchored by the solid state owned sectors.

    Sad to say most of the state owned stocks also pay lousy dividend around 3-5%, way lower than world standard. The only way one can make money is by appreciation in price. If you invest $20,000 in one of the four major banks in China from 1990, you would be a millionaire now. However, the best they can do now is probably increase by 50% in price in a decade. So unless you picked the right stock, return is quite low. This is actually a big dilemma facing Chinese with disposable income. So it comes as no big surprise to me that easily 80% of investor type immigrant to US(H-5), Canada, Australia etc are mainland Chinese. They need to park their extra money somewhere. Of course, their action have been misinterpret as the rich fleeing China.

    If there is a capital flight, the saving in China’s bank wouldn’t be increasing by $1 trillion plus yearly for the last five years or so. I also see many western commentators saying that China’s liquidity has been increasing greatly and a crash is imminent but did not bother checking the saving at China’s bank. Chinese consumers purchase 20 million new automobiles last year, around 8/10 paid cash! China’s govnt also face a similar issue that why they are hoping to invest their excess fund in the one region one belt initiative.

  4. N.M.Cheung
    July 7th, 2015 at 07:30 | #4

    The thing is China imitating Wall Street without putting the safety breakers is asking for trouble. In U.S. speculative stocks need 90 -100% cash for buying, only blue chips with 50% margin. At present the total margin after declining for 2 weeks still exceed 1 trillion Yuans. Most of those speculative stocks with price/earning exceed 100. With daily decline of 10% circuit breaker means most can’t even get out if they want to. The purpose of stock exchange is for capital for small and medium companies. Yet as in Wall Street it is getting more and more like a giant casino, defeating the whole purpose. U.S. stock market is holding up because of the QE forcing money into the market and the fact of dollar as a reserve currency with money from around the world flowing into U.S. . China should avoid this trap.

  5. July 8th, 2015 at 09:13 | #5

    “The purpose of stock exchange is for capital for small and medium companies. Yet as in Wall Street it is getting more and more like a giant casino, defeating the whole purpose. “

    Yes, unfortunately most stock market end up as some sort of casino. On June last year, China’s total stock market capitalization is around $4 trillion. On June this year it hit over $7 trillion. Unlike the US where foreigners or fund owned around 1/4 of the market, the figure for China is only 1%. The catalyst for last years rise was the cooling down of the property market (which is good but investor need to channel their money else where). Another major factor is the opening of HK-Shanghai market link allowing external fund to come in. However, this channel is controlled as RMB is not freely convertible and this link has a daily limit. So the rise and fall is totally the doing of Chinese citizens.

    All in all, it is a good lesson learned. The wealth on theory wasn’t destroyed but switched hands. That’s why the top 1% will get richer faster than anybody else, the next 10% would get rich slightly slower, and the next 20% even slower, and so forth. China’s GDP is around $11 trillion, a stock market capitalization of $4 trillion is still low. However, I always remind people that HK and Taiwan companies contribute way above their weight in mainland’s economy. That’s why we see a serious drop on those market too. Also mainland China everyday economy is not dominated by MNC as they do in developed economies. By contrast the US GDP is $17 trillion and its stock market capitalization is around $25 trillion.

  6. N.M.Cheung
    July 8th, 2015 at 12:48 | #6

    I have no real sympathy for the stock traders as they have no business hoping for windfalls while asking the government for bailout. The problem for this time as oppose to the drop during 2007 is the market is much bigger, and with half of the manufacturing stocks not trading at their request or lock down daily limit of 10%, the liquidity will worsen, and once the real trades resume the drop will be more close to 50% or more. Those stock which went up 1000% might easily go down 90%. I have to place some of the blame on government for allowing the bubble to form.

  7. July 8th, 2015 at 16:18 | #7

    Yes, but what do you propose the govnt do?

  8. N.M.Cheung
    July 9th, 2015 at 08:52 | #8

    1. Margin requirement should be 100% for speculative stocks with short history and high price/earning.
    2. As in U.S. holding stock long term(18 months) get lower tax rates.
    3. Increase transaction tax, especially when the market is in a bubble to discourage flipping.
    4. Discourages speculation on unofficial borrowings to play stock market by making illegal those funds which allow you to play market with up to 4 times.

    Stock market should be used to generate investment, not gambling. Any short term trades should be charged additional surcharges.

  9. September 7th, 2015 at 10:23 | #9

    Auto sales is always a good barometer of a country’s economic health. This year Shenzhen has introduced a limit of new car registration to 100,000 per year . This will reduce new cars sales by at least 300,000.
    http://www.reuters.com/article/2014/12/29/china-autos-idUSS8N0QU01H20141229

    In a separate development, while most car manufacturers see drop, or a little rise in sales Mercedes sales rise by 19% in June, 42% in July and a whopping 53% to 32,763 in Aug. Is the rich getting richer in China?

    http://www.bloomberg.com/news/articles/2015-08-06/mercedes-benz-china-sales-defy-slowing-market-with-42-july-jump

    http://europe.autonews.com/article/20150904/ANE/150909921/mercedes-sales-rise-18-in-august-on-china-surge

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