How China's Stock Market Volatility Undermines the Communist Party's Authority

HONG KONG -- At the very beginning of the Chinese stock market crisis in late June, many investors felt there were problems mostly related to liquidity issues. But gradually the concerns have grown to encompass more than the market itself. People have begun to talk about whether the government is capable of handling the stock market crisis, and whether this may end up as a broader crisis of governance.

China's leadership doesn't like uncertainty: Beijing basically wants everything under its control, from the exchange rate of the renminbi to the rise and fall of the domestic stock market. Part of the reason why the limits to the depths and heights of all stocks traded in Shanghai and Shenzhen are allowed to fall and rise is because the government simply likes certainty -- something that is predictable and ultimately can be kept under control.

The same mindset has been at work in the government's efforts to stabilize the stock market. The central bank has pledged to provide as much liquidity support to the market as is needed, and state-owned commercial banks have jointly provided over 2 trillion RMB in loans to the government-backed margin finance agency, the China Securities Finance Corp., to help it stabilize the market. But despite these rescue efforts, the market has still been in turmoil, recording its worst single-day fall in eight years on Monday. More retail investors, who contribute about 90 percent of daily trade in mainland China's stock market, have begun to be impatient and doubt whether the government, particularly the securities regulator, is capable of dealing with the market crisis.

The securities regulator has made a few missteps in its attempt to rescue the market.

First, the regulator tried to blame the crash on factors such as "malicious selling," "negative news and rumors," and "the grey market" and speculations in stock index futures. I'm not sure if there is such a thing as "friendly selling" when it comes to the Chinese stock market. There is also no clear definition of what a "grey market" is in China.

Second, a growing number of commentaries and news articles in state media have blamed "foreign interference" for the stock market crisis in China. "Foreign interference" has become an easy excuse for Beijing on everything from Hong Kong's pro-democracy Occupy Central movement to the stock market crisis. This really hurts the image of Chinese government and won't help rebuild investors' confidence in market.

There should be government interference to some extent when dealing with a market crisis. The U.S. government intervened in 2008. But what Beijing has been doing for the past month, including getting its public security department involved in the arrest of so-called "malicious sellers," has gone far beyond common sense and international norms.

In April, when the Chinese stock market was doing so well, making it one of the best performers in the world at that time, I remember some Chinese newspapers ascribed its performance to Xi Jinping and the top leadership's efforts to "create a new opportunity for wealth redistribution for everyone," to narrow the income gap, one newspaper concluded. The People's Daily even published a commentary describing 4,000 points as "just the beginning of the Chinese market's bull run."

China's stock market crisis has lasted about a month. It may recover sooner or later. If you think of the Chinese government as a large listed company, I guess what the company has done in response to the stock market crisis has already led many people to rethink its corporate governance and question the capability of the management. That is the long-term price the company has to pay, even if its share price recovers in the short term.

Original Article
Source: huffingtonpost.com/
Author: George Chen