Advancing Supervision and Regulation Models with the Times Is the Market's Greatest Fundamental Support

Author: [Mu Zi]
Source: [Fund Analysis]
Article type: Regular article
Published: 2007-6-8 19:24:00
Column: Expert Perspectives

Although this column clearly stated in Issue 5 on May 12 that "May marks 180 months since the 1429 high — half of 360 — an extremely important and sensitive time window, after which it would be impossible for nothing to happen," and although 4341 points, combined with the 1800-point rally from the February 6 low of 2541, already constituted strong technical correction pressure, the approach of artificially intervening in the market on May 30 — repeating the same old playbook from the past fifteen-plus years — is questionable. This once again demonstrates that a supervision and regulation system adapted to the current stage of capital market development has yet to be established. Without a mature supervision and regulation system, without mature market administrators, there can be no truly mature market or market participants.

Setting aside the question of how short-sighted it is to drastically increase investor transaction costs against the global trend of declining market trading costs — and the long-term damage this will cause to China's capital market development — just consider the release of such a significant policy change at an inappropriate time: its seriousness and prudence must obviously be severely questioned. This involves deep-level issues in the relationship between administrators and investors. The two are not master and servant, not parent and child, and certainly not sworn enemies. All market parties are, at root, market builders whose status is equal before the law, whose behavior is equally constrained by law. In a harmonious society, market administrators and investors should learn to coexist harmoniously — communicating more, understanding more — and should not treat each other as adversaries, much less resort to ambushes and covert attacks.

Even a good thing, if the methods and timing are wrong, will produce the opposite effect. Supervision and regulation, no matter how necessary the measures, must observe a most basic bottom line: they must not undermine investor confidence. Market administrators must be clear about their role as referees — they cannot artificially interfere with the course of the game, much less become participants in it. There cannot be multiple overlapping authorities issuing policies from different doors. Any policy or statement that affects the market must be coordinated, formulated, released, and implemented by a unified department. Any policy formulation and release should follow a standardized, transparent process, minimizing human-caused non-systemic policy risks as much as possible. Supervision and regulation should be guided by the scientific development concept, avoiding emotional and short-term approaches at all costs — this is the greatest source of investor confidence. Otherwise, if the administrators' own behavior is emotional and short-term, how can investors be expected to behave otherwise? Furthermore, supervision and regulation are fundamentally different things. A mature market administrator necessarily emphasizes supervision over regulation — even zero regulation. A market dominated by regulation cannot possibly become a mature market. How to gradually increase the weight of supervision while minimizing the impulse to regulate the market — this is the key to market administrators' maturation.

The impact of China's capital market on social development will only grow more profound. The old supervision and regulation system is already inadequate for the actual needs of market development. The urgent priority is to establish a supervision and regulation system adapted to the current stage of market development. The ultimate purpose of market supervision and regulation can only be one: to develop the market, not to destroy it. China's economic transformation and development dictate that the capital market must play its due, irreplaceable historical role. Any action that goes against this major direction will bear unforgivable historical responsibility. Under the major trend of capital globalization, the stability and security of the domestic capital market is a matter of equal importance to national defense.

The 1/2 line identified in Issue 5 has not only technical significance but is also the watershed between old and new operating models. The most important aspect of this is closely related to whether the supervision and regulation model can advance with the times. If the improvement of listed companies' earnings provides sufficient fundamental support for market development, then the advancement of the supervision and regulation model provides even greater fundamental support for market development. In a certain sense, this is the market's greatest fundamental support.

The technical analysis provided in Issue 5 remains valid. The great bull market will not be aborted by minor setbacks. Currently, the 1/2 line has moved up to 4144 points, with the corresponding Shenzhen Component Index level at 13,700. Whether the market can ultimately stand firm above this line is the key to judging whether the medium-term trend has turned bullish again. Before that, the broad market will gradually digest technical and policy pressure through oscillation. Among these, the 5-month moving average, currently near 3600 points, will be key in judging whether the market correction is normal. As long as this line is not effectively broken, the market correction remains within normal range; otherwise, the correction period will be significantly extended. Since June and July mark the beginning of the mid-year earnings season, first- and second-tier blue chips play a crucial role in index stability.

Finally, let me share a passage from the Analerta with all market participants for mutual encouragement: Zigong asked about governance. The Master said: "Sufficient food, sufficient arms, and the confidence of the people." Zigong said: "If one had to give up one of the three, which should go first?" The Master said: "Give up arms." Zigong said: "If one had to give up one of the remaining two, which should go first?" The Master said: "Give up food. Since ancient times, death has been the lot of all men, but a people without confidence cannot stand."

(Special Senior Advisor to this publication, Mu Zi)