Friday, 8 January 2016

Meddling in Markets Worse for Stocks

An investor watches the stock market drop which is important in free markets
This week has seen a rocky ride on the stock exchange with China worrying investors with its circuit breaker mechanism.

It was implemented on Tuesday, shutting down all trades after shares dropped more than 7 percent, and then yesterday -- where trading was only 13 minutes long before the circuit breaker cooled off trades.

The Chinese thought they could control the markets, but the past few days have shown China's drop in the value of stocks may possibly be due to production numbers being even lower than expected, or the state of China's economy is worse off than previously believed.

The aim of having the circuit breaker may have been to protect mainland stock investors, but it shows how volatile the stock market is in China and it is these fears that crossed the Atlantic and then the Pacific, adversely affecting investors in Europe and North America respectively

Last night it was decided by the China Securities Regulatory Commission to do away with the circuit breaker mechanism that was only implemented on Monday.

"The negative impact now has exceeded the positive side [of the mechanism]," said Deng Ge, a spokesman for the CSRC.

The left chart shows China, the one on the right, Hong Kong
Today the Chinese market ended slightly higher at 2 percent, while Hong Kong's Hang Seng Index was down 6.52 percent. It was the worst weekly decline since September 23, 2011.

That's a bit of consolation after such a crazy ride this week.

Part of the problem is that the vast majority of mainland stock investors have very little knowledge about stocks, many only hearing how they can earn money from trading them.

Instead many have a herd mentality, just following others' advice without much critical thinking and research, and a number of them are left holding the bag, while the savvier ones cash out with princely sums.

It's also interesting to note a business columnist's theory about how stock markets work relative to the economy's performance.

Jake van der Kamp's latest article shows two graphs. The first one is of the Chinese economy and stock market. As one line shows a steady diagonal climb to the right, indicating the mainland's increasing GDP annually, the country's stock market is performing miserably.

However the second graph shows Hong Kong's situation. The city's GDP moves in tandem with economic growth -- which van der Kamp says indicates a healthy economy -- when business is good, stocks are too.

It just shows how the mainland stock market is severely undermined by the authorities' interference, and adding the circuit breaker this week made things even worse.

One wonders whose head(s) will roll since the circuit breaker -- which was meant to help control the stock market -- did the complete opposite!

So while the Communist Party of China and President Xi Jinping may desperately want to control the stock market, trying to meddle not only makes it worse for their fledgling investors, but also gives the authorities less credibility.

China should really step back and let the market determine which publicly-listed companies will sink and who will swim. Only then can the Chinese economy become leaner and stronger.

But with its paranoia for control, a laissez-faire attitude won't be introduced any time soon. So hold on for more rocky rides on the stock market in the coming days and weeks.

1 comment: