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This Correction Is the Total Exposure of China's Capital Market Structural Defects

Author: [Site Administrator]
Source: [Internet]
Article type: Regular article
Published: 2008-4-3 18:34:21
Column: Expert Perspectives

This major correction starting from 6124 has exposed numerous problems. Issues that would absolutely never occur in mature markets have become the most eye-catching Chinese-style phenomena in this correction. It can be said that this correction is the total exposure of China's capital market structural defects. Since the problems are too numerous, we will select only two fundamental issues for detailed analysis.

I. China's capital market still does not possess the economic status that a mature capital market should have.

In a mature market economy, the capital market occupies the central position. Any ripple in the capital market is a national-level event. Look at the subprime crisis — the actual decline of the U.S. stock market hasn't even reached 20%. Yet it has already mobilized the entire nation, deploying every financial, fiscal, and governmental resource to stabilize the capital market. Why does the capital market hold such pivotal importance in the United States and all mature Western market economies? Because the capital market represents the core of their economic structure. Everything behind capital market operations represents the broad interests of the greatest number of people. In other words, in these mature market economies, the economy has evolved to such a degree that the economic interests of the vast majority of citizens are primarily and inseparably connected to the capital market at every moment. Since the economic base determines the superstructure, naturally, no government and no regulatory body dares show the slightest neglect toward the capital market.

But currently, China's capital market is far from achieving such status, because China's market economy is still at an extremely underdeveloped early stage. The capital market is currently just a small economic ornament, with essentially no substantive position in the economic structure.

This is because in China today, only a so-called small portion of the middle class and above have interests linked to the capital market. The majority of Chinese people currently have no connection to the capital market — they represent an economic structure that is relatively unrelated to the capital economy. In the overall orientation of national economic interests, sacrificing the minority for the majority is obviously the most easily adopted choice.

Therefore, in dilemmas such as the current CPI-versus-GDP trade-off, suppressing asset prices is mistakenly seen as a good tool for suppressing CPI. Consequently, sacrificing the capital market becomes the inevitable choice under this economic logic.

It can be asserted that before the middle class and above constitute the largest portion of the population, this bias in interest allocation is unavoidable. Without a clear understanding of this, one cannot have a correct understanding of many Chinese economic phenomena unique to China, and one absolutely cannot explain the Chinese-style vacillation and wavering on capital market issues over the years.

From this, it is not hard to understand why "protecting investor interests" has always been mere lip service. In reality, whenever the economy encounters any turbulence, the first to be sacrificed is always the capital market and its investors. The many phenomena unique to China's capital market are, at root, all driven by this fundamental structure of interest allocation. Until this structure is fundamentally changed by economic development and progress, none of this will fundamentally improve.

II. The administrators' service-oriented government principle remains only a principle, far from realizable.

Under the service-oriented government principle, capital market regulators are essentially servants of the market. But at the current stage, this standard is obviously far from achievable. Otherwise, for example, the Ping An incident would not have been endlessly dragged on for months with zero resolution. For a service-oriented institution, this is obviously a case of dereliction of duty that should be subject to oversight, correction, and even punishment. But the reality is that all of this is taken for granted — the bureaucratic habits of the regulatory body have made all this abnormality normal.

The biggest characteristic of a bureaucratic regulatory body compared to a service-oriented one is that its behavior is completely divorced from reality, with all response measures chronically lagging by several beats. For example, over the past two years, facing rapid price increases, even the most elementary economics common sense could provide the simplest and most effective response: rapidly increase supply. And supply increases must be timely — past the window, the measure no longer hits the mark. So what actually happened? The regulatory body not only failed to increase supply but instead provided quasi-illegal blue-chip stocks with extremely low float ratios — is this not the classic case of adding fuel to the fire?

A bureaucratic regulatory body can even harbor this terrifying mindset: decline is better than rise, decline means safety. The behavior of people in the capital market should ideally all conform to bank deposit behavior — that way nobody causes trouble, and no trouble is the best outcome. It is precisely because of such thinking over the past fifteen-plus years that China's capital market movements have displayed maximum speculative characteristics. Because everyone knows the window for rising is short, once opportunities arise they speculate with a vengeance, trying to capture the maximum profit in the shortest time.

Because both administrators and investors operate under such an atmosphere, a steady, long-term bull market can never truly materialize. Dramatic ups and downs become the true norm. At this point, talk of "preventing major market swings" becomes a very comical thing — a standard sample of bureaucratic regulatory language. May I ask: from 3400 to 6124 and back to 3400 in less than a year — isn't that a major swing? When something is already a fact, what is there left to prevent?

See the essence clearly, and you will have true power. The two problems above are only a small part of the issues exposed this time. The biggest problem currently facing China's capital market is that the vast majority of people — including the administrators — have not truly, substantively, and thoroughly understood the capital market's core, platform-level position in the modern economy. Toward the capital market, there still exists a serious instrumentalist mindset.

The future of China's finance and economy is certainly the capital market — this is the inevitable choice of the laws of global economic development, not subject to anyone's will. Failure to clearly recognize this can only cause more twists and turns on our capital road, more missed opportunities, and ultimately damage the economic heights we can ultimately reach.