Matters are made worse by China’s Market Rescue
What is the worth of a Chinese company?
In a country where individual investors drive over 80%of trade on local stock exchanges, that has probe to be a difficult question. However, now, it has become even harder to find the answer than it was before.
Between the unprecedented intervention by the government to prop up the $ 6.5 equity trillion market and trading suspensions in over 1,300 companies, analysts no longer rely on the share prices as an indication of corporate value in the largest growing economy in the world.
The remarkable shift in events comes not more than 2 years after the ruling Communist Party in China vowed to give market forces a much bigger role in the country’s economy, part of the largest reform drive since the 1990s. While the rescue mission of the stock market was purposed to stem a rout that got rid of $3.2 trillion in 3 weeks, it might only end up making the situation worse. Traders made a rush to sell what they could on Wednesday and foreign investors extended a 3 day exodus as the Shanghai Composite Index sank to 3.9% in early trading.
Hao Hong, a China strategist at Bocom International Holdings Co. in Hong Kong said “the market has failed”. Further, he said “It’s distorted because we keep changing the rules as we play the game”.
President Xi Jinping’s government is deploying heavy hand of the state as the Shanghai Composite’s record-breaking boom continues to bust in the attempt to prevent the stock prices from dropping and eroding confidence in his leadership. China has over 90 million individual investors, a constituency that is way larger than the Communist Party.
Authorities in China have suspended initial public offerings, restricted bearish bets through stock index fixtures, encouraged financial firms into buying shares and ordered companies that are state run to maintain holdings in the units listed. In perhaps what is the most dramatic effort at preventing investors from selling, Chinese exchanges commanded at least 1,323 companies into halting the trade of their shares.
A market analyst at Kabu.com Securities Co. in Tokyo, Tsutomu Yamada said it was absurd. Further, he said “It shows how much of a fake market it is. Those who want to sell will keep wanting to sell. When they start trading again, just think of how much selling there’ll be”.
The meddling of the government in the market is pushing historical price relationships to levels that are extreme.
China’s CSI 300 Index futures, among contracts that are heavily traded in the world, fell to a record discount versus underlying equity gauge in late trading on Tuesday. It is a sign that derivatives traders look at share prices as artificially high after trading suspensions and the efforts by the state to prop them. This is according to Jasper Lawler, an analysts based in London at CMC Markets.
China is not the only market with state intervention history. In 1998 during the Asian financial crisis, the government of Hong Kong bought shares worth $15 million to prop the market. In the US, the Securities and Exchange Commission temporarily banned short selling on certain shares during the 2008 financial crisis.