If China’s government is truly an advocate for continued market reforms, they’re clearly reading from the wrong playbook right now.
Its incessant meddling in the nation’s stock market – which borders on outright market manipulation – is about the furthest away from allowing markets to function as freely as one can get.
Banning some investors from selling, investigating those who still choose to sell and even arresting those who have sold shares “maliciously” are just some of the tactics the government have implemented in order to prevent an even greater meltdown in nation’s once-hot stock market, which has fallen around 40% since hitting multi-year highs in mid-June.
As a consequence of these obscure actions, not only is the government failing to practice what they preach in terms of pushing ahead with market-based reforms, they’re falling back to old habits of dictating what they believe should occur rather than letting market forces play their part.
Clearly the government is preaching free and liberalised markets, as long as participants are acting exactly as they want.
Look no further that what has recently occurred in the nation’s stock market futures exchange. It was once a poster child of Chinese financial market reform. As a result of banning some investors from selling, reducing trading limits, upping margins and probing those who dare to sell futures rather than buy, the government has single-handedly broken the futures market.
According to a report from Bloomberg, trading volumes in CSI 300 and 500 futures – once the largest index futures market in the world only three months ago – have collapsed as a result of government measures, falling an amazing 99% from their June 2015 peaks.
On Tuesday, another session where a mysterious late market surge pushed stocks up nearly 3% having been down close to 1% with two hours of trade remaining, volumes in CSI 300 futures – a derivative over the underlying CSI 300 stock index that contains the largest listed firms by market capitalisation in Shanghai and Shenzhen – fell to just 34,085 contracts, well below the 3.2 million levels seen in late June this year.
Chinese policy makers, according to the report, are intent on ending a selloff that has eroded confidence in their management of the economy, and are targeting the futures market because selling the contracts is one of the easiest ways for investors to make large wagers against stocks.
The reason for this is simple. There are no restrictions on intraday stock index futures trading, something that is banned in underlying stocks that have a minimum holding period of at least one day. Using futures, up until recently, was an effective way for speculators to bet on market declines. Now, with a position size of more than 10 contracts deemed to be “abnormal trading” by the futures regulator – previously capped at 600 index contracts – not only do smaller investors risk investigation if they choose to sell, but larger, more sophisticated institutional investors have also lost the ability to hedge positions held in underlying stocks.
No wonder investors are deserting not only futures trading, but the stock market too.
It is a shambles, with policymakers making rules on the run in an an attempt to achieve short-term goals. They’ve lost sight of the bigger picture – market reforms are no longer the goal but rather saving face.
While it is easy to see why the government initiated the stock market surge from mid-2014 – it would allow corporates to switch debt for capital, allow greater access to funding for smaller firms and help boost greater levels of consumption by increasing household wealth – akin to the huge stimulus program implemented during the height of the GFC, the plan was put into action immediately without thinking about the long-term consequences.
Now, China’s government is the laughing stock of financial markets, with many China watchers openly mocking the daily gyrations in the nation’s stock market. Terms such as the “national team” and “plunge protection team” are now regularly rolled out whenever the markets begin to tank, or whenever an unexpected surge occurs.
This is the government that they are referring too. Clearly, if China wants outsiders to believe that they’re pushing ahead with market reforms, their recent actions aren’t delivering the desired results.
As Tony Hann, a London-based money manager at Blackfriars Asset Management told Bloomberg, “it is further evidence that the Chinese authorities are not yet ready to commit to freely trading markets.”
“Fully functioning developed financial markets in China will take many years”.
That’s a sentiment many outside of China share at present. That’s why you get tweets like this:
Market stabilisation underway pic.twitter.com/QywQIKICFK
— Haidi Lun 伦海迪 (@HaidiLunCNA) September 8, 2015
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