China Regards Intervention with Its Stock Market as a Norm

An investor smiles as she walks past an electronic board showing stock information at a brokerage house in Fuyang, Anhui province, China, July 17, 2015. REUTERS/Stringer

On July 22, I gave a summary translation in my post “China Has Won Stock Market War” of Lin Zuoming’s article “Lin Zuoming: Disturbance in stock market is a war, enemy targeting the five-star flag” on Chinese Communist Party’s mouthpiece Global Times on July 21.

Lin tries to justify Chinese Communist Party (CCP)’s interference with the stock market by raising the ghost of foreign speculators’ attack similar to the attack that caused Asian financial crisis in late 1990s. Due to the strong nationalism in China caused by US and Japan’s provocation over the South China Sea, Lin’s argument, no doubt, is quite popular and convincing among ordinary Chinese people.

This blogger, however, points out at the end of the post that he believes the recent stock market crash in China has been caused by local speculators. He says:

China has to improve regulation of its market to prevent excessive speculation and protect retail investors. It is time now for China to have the innovation and creation to regulate its market through its own efforts instead of copying Western practices. The recent world financial crisis caused by US banks’ excessive property loans has proved that Western system is not perfect. China shall learn from their advantages and avoid their shortcomings.

Readers, especially Western readers, including Western China watchers, tend to believe that modernization means Westernization so that China’s modernization must leads to its Westernization to accept what the West regards as universal values.

US talented political scientist Samuel P. Huntington pointed out in his gifted book The Clash of Civilization that “The rivalry of the superpowers is replaced by the clash of civilizations” after the end of the Cold War. US government just ignored Huntington’s advice. As a result it failed to prevent 911 which was precisely the result of the clash between Western and Islamic cultures that Huntington regards in his book as the first trouble in the world after the end of Cold War.

The clash remains now the West’s top trouble.

In chapter 3 of the book, Huntington points out the trend of de-Westernization in the later stage of modernization in non-Western countries. However, people just disregard Huntingdon’s view and judge China by Western standards.

As pointed out in my book Tiananmen’s Tremendous Achievements, China’s political system remains a dynasty, but it is not a feudal hereditary dynasty but a dynasty of the Chinese Communist Party. There is a core of collective leadership with the final-say power like an emperor.

When a dynasty is good with a wise and benevolent emperor, people depends on him for protection of their interests so that the rich cannot rob or steal from the poor and powerful officials shall take care of the people instead of exploiting and persecuting them. That will be a dynasty that “puts the people first” advocated by Confucian sage Mencius. I have a full chapter in the book that describes Mencius democracy of “putting the people first” and Emperor Taizong of Tang’s implementation of Mencius democracy; therefore, I do not repeat here.

Certainly, a dynasty lacks the continuity to ensure that a wise and benevolent leader is succeeded by similar wise and benevolent ones. There shall certainly be democracy to prevent the emergence of a tyrant like Mao that the existing Chinese system cannot prevent or remove when such a tyrant has emerged.

However, we cannot deny that when there is a wise and benevolent leader like Xi Jinping, he has acted wisely to be the arbiter between retail investors and rich speculators to prevent the latter from exploiting the loopholes in Chinese market to rob the former.

In order to protect retail investors without reducing the vigor in China’s stock market, Chinese leaders shall have the wisdom to develop a system better than Western ones. They shall also have the vision to accumulate the strength and introduce the rules to defeat foreign financial giants’ attack at Chinese market and currency that may cause an economic crisis in China.

China has learnt lots from the West, but it now has to embark on its own way to develop the system that suit its national situation.

That is why the CCP’s mouthpiece strongly refutes domestic and foreign criticism of China’s intervention with the market. SCMP gives a report on that titled “Beijing says it must intervene in markets ‘when necessary’, in fresh defence of bailout”. The following is the full text of the report:

Beijing says it must intervene in markets ‘when necessary’, in fresh defence of bailout

Communist Party mouthpiece suggests Beijing is prepared to step in again should turbulence return, despite pressure to find exit strategy

A commentary in the Communist Party’s flagship publication yesterday suggests the mainland government is prepared to intervene in the stock market again if turbulence returns.

The article in People’s Daily, which says that maintaining financial stability should be a top priority, is the latest piece by state media to reaffirm Beijing’s intervention to stabilise the stock market, amid mounting pressure on authorities to prepare an exit strategy.

We must be resolute in taking action and measures when necessary

PEOPLE’S DAILY

It said the finance sector was the lifeline of the national economy and warned that instability would jeopardise years of market reform.

“When abnormal volatility and irregularities arise, we must be resolute in taking action and measures when necessary, without hesitation,” the commentary said. “Genuine financial stability must be a proactive, long-term and sustainable stability – not a passive, short-lived and unsustainable stability.”

On Monday the paper said intervention in the stock market was an “international norm”.

“It was obviously a morale-boosting article aimed at soothing investors’ concerns about the market outlook,” said Haitong Securities analyst Zhang Qi. “But a boom-to-bust cycle is unlikely to happen in the coming three or four months.”

The commentary also dismissed calls for the pace of market reforms in the financial sector to slow, arguing more change was needed for stability.

The A-share market has been on a roller-coaster ride since June 15, with stock markets dipping more than 30 per cent in three weeks, wiping out US$3 trillion of market value.

Beijing stepped in to stem the market crash as regulators suspended new share offerings and ordered major shareholders not to sell stock but to increase their holdings.

The central bank also injected liquidity into the China Securities Finance Corporation, which distributed cash to mutual funds to buy shares.

It was estimated that the rescue efforts had cost more than 1trillion yuan (HK$1.26 trillion) of capital, though it remained unclear how and when the regulators would work out a plan to withdraw the funds.

Lin Zuoming, chairman of the Aviation Industry Corporation of China, said recently that the market crash was the result of a scheme by hostile foreign investors to undermine the country’s reforms and overthrow the party.

On Monday, financial news outlet Caijing said regulators were studying how to withdraw the rescue funds, but the China Securities Regulatory Commission denied the report.

The market rout happened after the benchmark indicator surged 120 per cent from October 2014, buoyed by an influx of speculative capital.

State-owned media such as Xinhua were blamed by millions of retail investors for publishing upbeat articles in late April, encouraging them to chase the rally amid the country’s deepening economic reforms.

Levin Zhu Yunlai, son of former premier Zhu Rongji and former chief of China International Capital Corporation, this week criticised some of the stabilisation measures. He said regulators should come up with a more systemic approach.

PUBLISHED : Thursday, 23 July, 2015, 2:43pm
UPDATED : Thursday, 23 July, 2015, 11:46pm
Daniel Ren

Article by Chan Kai Yee in response to Global Times and SCMP’s reports.

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