If a class of major stock market investors can be barred from selling their holdings at the whim of government regulators, can the exchange in that country really be called a market at all? It’s a question investors in China’s volatile economy must be asking themselves today, and many will have at least six months to ponder the question, because a government directive on Tuesday barred any individual or fund that holds more than 5 percent of the shares of a Chinese public company from selling their holdings for that period of time.
The move by the China Securities Regulatory Commission was the latest in a series of efforts to end the dramatic plunge in the country’s stock markets in the past month. After nearly a year of spectacular gains, fueled in large part by a surge of small-dollar individual investors entering the market – often with borrowed money – the Shanghai composite index has lost 32 percent of its value in three weeks and was down another 5.9 percent Wednesday. The smaller, tech-heavy Shenzhen market if off an eye-popping 41 percent over the same span.
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The bubble may not be done deflating, either. The surge in Chinese equities, which have more than doubled in the past year alone, appears utterly disconnected from the reality of the Chinese economy, which is experiencing a pronounced deceleration in growth. Wednesday’s plunge, in fact, might easily have been even worse if Chinese regulators had not allowed more than 1,000 firms to halt trading in their shares altogether.
“At the moment there is a mood of panic in the market and a large increase in irrational dumping of shares, causing a strain of liquidity in the stock market,” CSRC said in statement announcing the ban on stock sales by major investors. The move came as the latest in a series of increasingly desperate moves by the government to prop up share prices.
Regulators have already blocked the issuance of new Initial Public Offerings and have pumped billions into the market by forcing government-owned brokerages to buy shares as they fell. The Chinese Central Bank has slashed interest rates and reduced the reserve requirements on commercial banks.
Shockingly, the central bank even reduced the requirements on margin loans, which allow investors to speculate with borrowed money.
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"That’s crazy,” said James A. Dorn, vice president for monetary studies at the Cato Institute in Washington and a specialist in Chinese financial markets. “Chinese retail investors don’t know what they’re doing. They’re gambling, basically.”
Dorn, who writes a regular column for Caixin, a leading Chinese financial publication, said that even in the unlikely event that the government’s massive intervention ends some of the short-term pain investors are feeling, it’s doing serious long-term damage to international investors’ view of the Chinese economy as an investment opportunity.
“This is going to certainly discourage foreign investors from allowing Chinese stocks in their portfolios unless you are extremely speculative,” Dorn said. “It undermines trust in the financial system. They have been trying to open up their capital markets … but this is a good indicator that at the foundations, they haven’t made much progress.”
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While most investors in the West have at most only limited exposure to Chinese stocks, the global economy as a whole won’t be unaffected if the Chinese stock market rout turns into a broader economic crisis.
“China’s not a little economy like Greece,” he said. “If China gets into a real slow growth situation, which would mean for them something 6 percent or less, that’s going to have a big ripple effect on the global economy.”
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