Stephen S. Roach
Stephen S. Roach, former Chairman of
Morgan Stanley Asia and the firm's chief economist, is a senior fellow
at Yale University's Jackson Institute of Global Affairs and a senior
lecturer at Yale's School of Management.
Read more at http://www.project-syndicate.org/commentary/china-stock-market-bubble-intervention-by-stephen-s--roach-2015-07#eQMhI9W6EvwDyqC7.99
Market Manipulation Goes Global
NEW
HAVEN – Market manipulation has become standard operating procedure in
policy circles around the world. All eyes are now on China’s attempts to
cope with the collapse of a major equity bubble. But the efforts of
Chinese authorities are hardly unique. The leading economies of the West
are doing pretty much the same thing – just dressing up their
manipulation in different clothes.
Take quantitative
easing, first used in Japan in the early 2000s, then in the United
States after 2008, then in Japan again beginning in 2013, and now in
Europe. In all of these cases, QE essentially has been an aggressive
effort to manipulate asset prices. It works primarily through direct
central-bank purchases of long-dated sovereign securities, thereby
reducing long-term interest rates, which, in turn, makes equities more
attractive.
Whether the QE strain
of market manipulation has accomplished its objective – to provide
stimulus to crisis-torn, asset-dependent economies – is debatable:
Current recoveries in the developed world, after all, have been
unusually anemic. But that has not stopped the authorities from trying.
In their defense,
central banks make the unsubstantiated claim that things would have been
much worse had they not pursued QE. But, with now-frothy manipulated
asset markets posing new risks of financial instability, the jury is out
on that point as well.
China’s efforts at
market manipulation are no less blatant. In response to a 31% plunge in
the CSI 300 (a composite index of shares on the Shanghai and Shenzhen
exchanges) from its June 12 peak, following a 145% surge in the
preceding 12 months, Chinese regulators have moved aggressively to
contain the damage.
Official actions run
the gamut, including a $480 billion government-supported equity-market
backstop under the auspices of the China Securities Finance Corporation,
a $19 billion pool from major domestic brokerages, and an open-ended
promise by the People’s Bank of China (PBOC) to use its balance sheet to
shore up equity prices. Moreover, trading was suspended for about 50%
of listed securities (more than 1,400 of 2,800 stocks).
Unlike the West’s
QE-enabled market manipulation, which works circuitously through
central-bank liquidity injections, the Chinese version is targeted more
directly at the market in distress – in this case, equities.
Significantly, QE is very much a reactive approach – aimed at sparking
revival in distressed markets and economies after they have collapsed.
The more proactive Chinese approach is the policy equivalent of
attempting to catch a falling knife – arresting a market in free-fall.
There are several
other noteworthy distinctions between China’s market manipulation and
that seen in the West. First, Chinese authorities appear less focused on
systemic risks to the real economy. That makes sense, given that wealth
effects are significantly smaller in China, where private consumption
accounts for just 36% of GDP – only about half the share in more
wealth-dependent economies like the US.
Moreover, much of the
sharp appreciation in Chinese equity values was very short-lived.
Nearly 90% of the 12-month surge in the CSI 300 was concentrated in the
seven months following the start of cross-border investment flows via
the so-called Shanghai-Hong Kong Connect in November 2014. As a result,
speculators had little time to let the capital gains sink in and have a
lasting impact on lifestyle expectations.
Second, in the West,
post-crisis reforms typically have been tactical, aimed at repairing
flaws in established markets, rather than promoting new markets. In
China, by contrast, post-bubble reforms have a more strategic focus,
given that the equity-market distress has important implications for the
government’s capital-market reforms, which are viewed as crucial to its
strategy of structural rebalancing. Long saddled with a bank-centric
system of credit intermediation, the development of secure and stable
equity and bond markets is a high priority in China’s effort to promote a
more diversified business-funding platform. The collapse of the equity
bubble calls that effort into serious question.
Finally, by
emphasizing a regulatory fix, and thereby keeping its benchmark policy
rate well above the dreaded zero bound, the PBOC is actually better
positioned than other central banks to maintain control over monetary
policy and not become ensnared in the open-ended provision of liquidity
that is so addictive for frothy markets. And, unlike in the West,
China’s targeted equity-specific actions minimize the risk of financial
contagion caused by liquidity spillovers into other asset markets.
With a large portion
of China’s domestic equity market still closed, it is hard to know when
the correction’s animal spirits have been exhausted. While the
government has assembled considerable firepower to limit the unwinding
of a spectacular bubble, the overhang of highly leveraged speculative
demand is disconcerting. Indeed, in the 12 months ending in June, margin
financing of stock purchases nearly tripled as a share of tradable
domestic-equity-market capitalization.
While Chinese
equities initially bounced 14% off their July 8 low, the 8.5% plunge on
July 27 suggests that that may have been a temporary respite. The
likelihood of forced deleveraging of margin calls underscores the
potential for a further slide once full trading resumes.
More broadly, just as
in Japan, the US, and Europe, there can be no mistaking what prompted
China’s manipulation: the perils of outsize asset bubbles. Time and
again, regulators and policymakers – to say nothing of political leaders
– have been asleep at the switch in condoning market excesses. In a
globalized world where labor income is under constant pressure, the
siren song of asset markets as a growth elixir is far too tempting for
the body politic to resist.
Speculative bubbles
are the visible manifestation of that temptation. As the bubbles burst –
and they always do – false prosperity is exposed and the defensive
tactics of market manipulation become both urgent and seemingly logical.
Therein lies the
great irony of manipulation: The more we depend on markets, the less we
trust them. Needless to say, that is a far cry from the “invisible hand”
on which the efficacy of markets rests. We claim, as Adam Smith did,
that impersonal markets ensure the most efficient allocation of scarce
capital; but what we really want are markets that operate only on our
terms
Read more at http://www.project-syndicate.org/commentary/china-stock-market-bubble-intervention-by-stephen-s--roach-2015-07#eQMhI9W6EvwDyqC7.99
