Do Not Fight against Rich and Powerful Government in Stock MarketPosted: July 29, 2015
When rich and powerful international speculators attacked Hong Kong stock market during the Asian financial crisis, Hong Kong government interfered with its substantial foreign exchange reserve and the support of China’s central government. It defeated the speculators and made a huge profit.
Because it had the best sources of information about the market so that it knew what level to buy with certain profits and because it has the financial ammunition for the battle.
The situation now is the same in China, but the Chinese government has even greater power to defeat speculators.
Because in addition to better information about the market and larger financial resources, the government is able to change the rules to support the market at will in disregard of speculators’ and foreign and domestic opposition.
Some foreign media have cried foul for market freedom. Others have warned that international investors will leave Chinese stock market but all in vain.
It is just the same with China’s construction of large artificial islands in the South China Sea. In spite of US strong warning of interference, Japanese threat of patrolling the area and Philippines’ seeking of arbitration, China continues its construction.
Reuters’ report “Trapped in the market, China retail investors plot escape with government money” seems to predict that Chinese government may suffer too high losses as government has to buy retail investors’ stock holdings to enable them to flee the market.
The report fails to see that the government buys at a level that it regards as profitable according to its information about major listed companies. Please do not forget that most list companies are owned and controlled by the government.
When retail investors sell above the level maintained by government funds, the proceeds of their sales come from other investors instead of the government.
The report is absolutely right in pointing out that greed is the driving force in stock market. That was why according to Reuters’ statistics, 10 million investors have opened new accounts and made huge investment in the market since May.
The report quotes financial expert Bernard Aw as saying “Monday (July 27)’s plunge showed the Chinese authorities that even governmental measures have their limits. It’s anybody’s guess what else they can do to shore up market sentiment.”
What else the government can do?
Buy more at the profitable level to make more money when the market rises like what Hong Kong government did during the Hong Kong stock market crisis.
What is Chinese government’s motive?
Greed? Certainly, but not for money but for popular support.
China is conducting a thorough economic reform that has given rise to the teething problems of economic slowdown. China is now under heavy US pressure of interference in the South China Sea.
Popular support is indispensable for the success of reform. It is even more vital for its potential war of defense against US interference.
One thing is obvious in Reuters’ report: Chinese retail investors support government move to stabilize the market. It proves that the government has gained even greater popularity among the growing and increasingly influential well-to-do middle class that constitutes the majority of retail investors.
In fact, it is not the Chinese government but international and domestic speculators who have to be warned: Their speculation to manipulate Chinese market will cause them to lose money to the Chinese government!
Article by Chan Kai Yee in response to Reuters’ report “Trapped in the market, China retail investors plot escape with government money”
The following is the full text of Reuters’ report:
Trapped in the market, China retail investors plot escape with government money
SHANGHAI By Pete Sweeney Tue Jul 28, 2015 7:52am EDT
Mrs Zhu is just the type of investor the Chinese government should worry about as it tries to engineer a turnaround in the country’s stock markets, whose massive swings have heightened fears for the country’s financial health.
One of millions of retail investors trapped by the market crash in June who prefer to hold losing positions rather than take a loss, Zhu is just waiting for indexes to rise so she can sell.
“I will sell all my shares tomorrow if there is a chance,” said the government clerk, who almost hit the sell button last week after markets had recovered somewhat from June’s slump. But because she was still set to take a loss, she held on.
“I am pretty sure that if the government does not come to rescue us, the situation will get much worse,” she said.
Zhu’s way of thinking is so common there a Chinese phrase for it. “Tao lao” once meant being captured by a lasso, but is now most commonly used to mean “trapped in the stock market”, which implies an investor cannot sell out of a losing position.
The logic is also the opposite of what wealth managers typically advise; better to take a loss and move the money into something likely to produce stronger returns.
This highlights the risk Beijing faces in sustaining a market turnaround. Every time the government succeeds in pushing up share prices, an army of retail investors jump in to sell at their break even point, immediately knocking back market confidence.
Given that retail investors conduct an estimated 80 percent of trades, that means the government could face a long, hard grind before it can stabilize markets.
Chinese stocks more than doubled in the six months to May before crashing in June by more than a third, prompting a flurry of government inspired measures, including share buying, to stabilize prices. That calmed markets for most of July, before a sudden drop of more than 8 percent on Monday – the biggest one-day fall since 2007.
“Monday’s plunge showed the Chinese authorities that even governmental measures have their limits. It’s anybody’s guess what else they can do to shore up market sentiment,” said Bernard Aw, a market strategist at financial spreadbetting company IG.
While investors who bought before mid March are still in the black thanks to previous gains, a Reuters analysis of public data shows that another 10 million investors opened new accounts since April, helping push up China’s market capitalization by a net $4.5 trillion – until the bottom fell out in mid June.
Those figures do not include existing investors who added to their positions during this period, nor the famously stubborn holdouts who are sticking to loss-making positions that are years old.
Mrs Xu is one of them. She said she has been holding shares in China Life Insurance (601628.SS) since 2007, when it traded for around 75 yuan ($12.08) per share.
The stock gained a bit during the recent rally, at one point crossing over 42 yuan per share but then fell back to around 28, and Xu is still holding on.
“I thought I might be able to taking the losses back riding on this round of bull market, but it is still losing money so far,” she said, adding she is also holding onto loss-making positions she took earlier this year and plans to sell as soon as they break even.
“Maybe I am too greedy,” she said.
Both Mrs Zhu and Mrs Xu declined to provide their full names.
To be sure, one upside for Chinese regulators is the “tao lao” mentality can slow selling in a falling market, explaining why there was so little popular outcry in June when nearly 40 percent of listed companies halted trading in their shares so they could ride out the crash.
It could also explain why the government set a semi-official recovery target of 4,500 points for the Shanghai Composite Exchange, which would encourage investors who think this way to wait. The index .SSEC closed on Tuesday at 3,662.81 points.
For Beijing, the biggest worry is that investors who were once patient are now so rattled by the big market swings that they are ready to accept losses just for peace of mind.
“Yesterday all my stocks hit limit down and I lost 20 percent of my money. Today all my stocks fell limit down again!” said student Liu Fangrui.
“I managed to sell them all at a loss today, and so I lost 320,000 yuan in two days. I don’t have confidence on the market any more. I don’t want to get into the market again.”
(Additional reporting by Sam Shen and the Shanghai newsroom; Editing by Neil Fullick)