The National Economic Will Must Have Its Market-Based Expression

Author: [Mu Zi]
Source: [Fund Analysis]
Article type: Regular article
Published: 2007-11-10 15:51:17
Column: Expert Perspectives

Under planned economy conditions, the state's economic will could be expressed through many channels, the only one it lacked being market-based expression. Under market economy conditions, relying solely on hard methods like administrative orders and policy directives for regulation is clearly outdated. Under market-based approaches, the deployment of state-owned shares, foreign exchange reserves, social security funds, and other state assets will inevitably embody the national economic will. How to properly manage these relationships deserves serious exploration and study, as it concerns national economic security and the ultimate realization of the national economic development strategy.

The national economic will is not a momentary impulse, nor can it be based on short-term interests or moral urges. The national economic will must be built on the foresight, comprehensiveness, and systematicity of national strategy. Without foresight, it would be like a retail investor following a market maker — running after other major nations' thinking. That is absolutely unacceptable. China is a great power. Its economic will must possess the magnanimity of a great power, must exert a Chinese-style gravitational pull on the world economic and political landscape, must reflect a Chinese voice, and must ultimately realize Chinese-style strategic objectives. Without comprehensiveness, it equally won't do. China's national economic will must be comprehensive in its strategic orientation — not for certain times, certain places, or certain people's interests. Its ultimate economic benefits must embody and realize the greatest and ultimate interests of all citizens. As for systematicity, it means China's national economic will must and inevitably will be concretely expressed as an organic system with rigorous internal connections, multi-layered construction, and operability and achievability.

Currently, just from the perspective of concrete asset deployment: state-owned shares are already the largest and absolutely controlling force in the stock market. The current index has already become entirely the domain of China-prefix stocks. Social security funds will ultimately play an extremely important role in the transfer, reduction, and eventual management of state-owned shares. And the establishment of CIC (China Investment Corporation) has given the deployment of foreign exchange reserves a significance transcending mere tactical trading, both in domestic and foreign capital markets, with at least strategic-level coordination and implicit strategic importance.

But the national economic will is not merely reflected in specific stocks or market-based operations. More importantly, the expression of the national economic will must absolutely not degenerate into a market-maker-style controlling operation — that would be extremely dangerous. The national economic will should become an important, even the most important, component force in the market, but cannot become the market's resultant force itself, much less the market's sole force. Once it evolves toward such a dangerous state, the so-called market-based expression of the national economic will becomes empty talk. This so-called market-based expression would instead become a force that destroys the market's foundations.

Furthermore, the national economic will must also be expressed in the protection of national economic resources. National economic resources include not just narrow real-economy, physical resources, but also — under virtual economy conditions — all resources capable of generating market, capital, and similar effects. For example, China's excellent companies are the greatest economic resource of China's capital market. How to rationally utilize these resources — rather than letting them be sold cheaply, flow abroad, or be overdeveloped for short-term gain — is a very real and much-taught-by-painful-lessons significant issue.

From the capital deployment level, funds that have become excessively marketized and excessively plagued by insider trading (rat trading) can no longer independently serve as the economic expression of the national will. A new, absolute balancing force must be introduced to strengthen regulation. Since at the real economy level, the state maintains absolute controlling stakes in industries vital to the national livelihood, then at the virtual economy level, such absolute control is beyond question. That is, this absolute control must also necessarily include macroscopic control over the overall movement of stock prices.

The state's gradual withdrawal from hard regulation at the policy level must and inevitably will be accompanied by mastering an absolute regulatory force at the economic level. Otherwise, capital's challenge to policy would create an uncontrollable situation — completely incompatible with China's national conditions. Strengthening the state's regulation of the economy includes both the real and virtual layers. And strengthening the state's economic regulatory leadership over the virtual layer is a problem that must be solved as quickly as possible.

Finally, a word on recent market movement. After the market topped at 6100 as indicated by this column in September, the pullback triggered by PetroChina's return formed a neckline break, and the so-called double top was thus completed. This column already stated in September: a break above 6100 would trigger a correction exceeding the 5.30 level — that is, a medium-term correction. This correction is necessary for the healthy development of China's stock market. Though the process is painful, it is the price that must be paid for the still-bright tomorrow of China's stock market.

From a purely technical standpoint, the neckline zone of 5462-5555 will be the most critical zone for the medium-term trend. If the short-term bounce cannot reclaim and hold above this zone, the magnitude and duration of the correction will increase further.

December marks the 30th month since the historic bottom of 2005. If the market touches this time window in a bottoming pattern, then the first foot of this medium-term correction will have landed. Under normal fundamental conditions, the 120-day moving average will be a suitable landing zone for the first foot. As for whether a sizable rebound followed by a second foot is needed to confirm the end of the medium-term correction — that will be closely related to the international economic environment and national policy conditions in early next year. Technically, the 250-day annual moving average zone will carry decisive significance.