Who is to blame for China’s market turmoil?

On the last day of this year’s Boao Forum in Hainan, panelists representing areas of the financial markets discussed last summer’s stock market meltdown.

Why did China’s stock market plunge so much last year? Why did the drop trigger exceptional national-level rescue measures? Who should take the blame?

On the last day of this year’s Boao Forum in Hainan, panelists representing areas of the financial markets discussed last summer’s stock market meltdown.

“Leverage: the trouble-maker?” explored the real cause of last year’s stock market crash and other problems of China’s capital markets. Here are the highlights of their remarks.

Gao Xiqing, former vice-chairman and president of China Investment Corporation and former vice-chairman of the China Security Regulatory Commission (CSRC).

Leverage is just a tool, which is one of the best tools invented by humans. If you say the leverage caused trouble last year, that was not because of the leverage itself, but because people didn’t use it properly.

Firstly, there was [certainly] something wrong with the regulation. Now each regulator shrinks responsibility and shifts the blame onto others. Then whose responsibility was it? Recently there’s a proposal, suggesting the People’s Bank of China combine with the three regulators of securities, banking and insurance, as there are regulatory gaps between them.

Many [Chinese] government organizations merged in the past. But it didn’t prove to be effective as each organization still acted in its own way. You have to figure out what went wrong first [before talking about such a merger].

Now people blame either the leverage, foreign investors or derivative instruments. Everyone is guessing. You don’t even have the numbers. Our current problem is that the figures about China’s capital markets are still confidential.The regulators, brokerage houses and even investors all have their own stance about the cause of the stock market crash. The government should assign an independent institution to find out what exactly happened.

Li Jiange, vice-chairman of Central Huijin Investment and former vice-chairman of the CSRC.

The parties concerned said China’s market rescue was consistent with international practice. But if you think again and use “should we rescue, under what circumstances, how to rescue and who to rescue” – these four standards, [you will realize] nothing China did last year was in line with international practice.

The regulators leading those they supervise to rescue the market is like the referee leading a group of designated footballers to play football. You can only score goals if the referee lets you. It’s impossible to play football like that.

In May 2015, I already told some reporters the “national bull market” was a very dangerous concept. Some official media helped boost the sentiment of the market frenzy. If the bull market belonged to the government, then the bear market belonged to whom? If the government wanted to take credit for the bull market, it should also take the responsibility for the bear market.

I cannot recall one single country that allowed regulators to lead the regulatory targets to rescue the market. In the US, the Fed came forward while the US Securities and Exchange Commission didn’t participate at all…Therefore, it was very unconvincing to use international examples to justify China’s market rescue last year.

Wu Xiaoqiu, director, finance and securities institute at Renmin University.

After we’ve developed the capital markets for more than 20 years, we still lack a profound understanding of what the markets are for. Capital markets are for fundraising, wealth management and risk dispersion, which cannot be provided by banks.

China wants the renminbi to be internationalized but internationalization cannot rely on a strong commercial market, but [strong] capital markets. It’s like growing rice in dry land but you have to grow.

There have been mismatches between the regulator’s role and its goal. Over a long period of time in the past, regulators’ achievements were somehow linked to the [rise] of an index. If the index fell during one official’s tenure, he would be seen as unqualified, and vice versa. This was problematic. Regulators were seen as scavengers.

It is very difficult to develop the capital markets in China. We have been too utilitarian, which is beyond what the market can bear. Capital markets require the whole social environment to match with them, while there’s a big gap in China. For instance, transparency is fundamental for capital markets. When there’s no transparency in society, it’s extremely difficult to ask the capital markets alone to be transparent.  

Jia Kang, former director of the research institute for fiscal science at the finance ministry.

When the stock market started to advance last year, it was very obvious that regulators wanted to turn it into a bull market. The so-called “national bull market” was against [market] rules. It was artificial. Chinese regulators always think a bull market is great and a bear one is bad. They have to rethink [profoundly].

Due to the sheep-flock effect, investors flocked [to the stock market]. The drastic ups and downs soon exhausted the market momentum.When we talked about the bull market of last year, we said it was driven by policy, capital and reform. All these made sense. But the market lacked one key bullish element – economic fundamentals. The economy was slowing at the time, which hasn’t stopped so far. The market couldn’t prop up [in this case].

Ha Jiming, vice-chairman of the investment management division (China) of Goldman Sachs.

Leveraged investment in the stock market was just some trillion yuan. But the debts in the whole economy are 250% of Chinese GDP, or Rmb170 trillion ($26 trillion). China’s debts have risen from over 100% of GDP in 2007 to 250% last year. The key reason for the fast increase in the short term is the blind, unrealistic pursuit of high economic growth rate, regardless of financial risks.

Whether these debts can be repaid on time or eventually paid off become problems. But meanwhile you have to develop economy. What to do? Then [the government] thinks it should develop the equity financing, rather than relying on banking loans. Last year’s stock market rally could be associated with the high leverage ratio in the economy.

If China wants to realize an economic growth rate of 6.5%+ over the next five years through old ways, instead of reform, its debt-to-GDP ratio would reach 340% by 2025, which would be a huge risk. China’s debt ratio has increased by almost 100% since 2008. Countries with such a fast increase in debt ratios, without exception, all suffered financial crisis or a long period of economic stagnation. These are lessons paid for with blood.

The third plenum [of the Communist Party of China] said clearly: to let the market play the decisive role. But if you think about [what has happened in recent months], the government still plays a huge role most of the time. It says one thing but does another. 

Mark Machin, head of international, Canada Pension Plan Investment Board (CPPIB), also took part in the panel discussion.

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