22 September 2019
Puzzled about what to do in this roller-coaster market? Sit tight until Beijing is done with its interventions. Photo: CNSA
Puzzled about what to do in this roller-coaster market? Sit tight until Beijing is done with its interventions. Photo: CNSA

What should investors do amid Beijing’s interventions?

The three mainland Chinese securities exchanges intend to introduce a “circuit breaker” mechanism.

Draft regulations provide for trading to be suspended for 30 minutes when the CSI Index rises or falls 5 percent.

If the index goes up or down 7 percent or more, trading will be suspended for the day.

It’s expected that the “circuit breaker” will be launched as early as next month.

At present, individual stocks and index futures are allowed to move a daily maximum of 10 percent from the previous day’s close.

This trading cap will now extend to all products.

That is part of a string of government efforts to stem a further market slide.

The authorities recently announced measures including a crackdown on forward trading and raising margin and administration fees.

And the “national team” has reportedly poured up to 1.5 trillion yuan (US$235 billion) into rescuing the market.

Will A shares bottom out soon?

The Shanghai Composite Index usually rebounds in the last 30 minutes of the trading day, led by heavyweight stocks, which are targets for buying by the “national team”.

However, the index still hovers around 3,000 points two months after the appearance of the “national team”.

If the “visible hand” can hold sway in the market, so can the “invisible hand”.

The index started to run up in April last year, when the market was awaiting the launch of Shanghai-Hong Kong Stock Connect.

After the launch, the index rose to nearly 5,200 points in June this year from about 2,000 points a year earlier.

Delays in the inclusion of A shares in a key MSCI index and of the renminbi in the International Monetary Fund’s special drawing rights basket of currencies have thwarted Beijing’s efforts to liberalize China’s financial markets.

It would not be impossible to see the index swing back to the 2,000 level.

Market fluctuations are quite normal, but the participation of the “visible hand” will certainly extend the length and depth of the market correction.

Investors may adjust their trading strategies from time to time.

But long-time government intervention in the stock market could scare them away, leading to continued capital outflow.

Is that something Beijing hopes will happen despite its impact on its efforts to open up markets and lure global funds?

It’s quite a tricky task to rescue the market focusing on the “score board”.

Any failure could trigger systemic risk.

And the market would become dead and lose its function of raising capital even if the rescue works.

“To get what you want, you have to deserve what you want,” says Charlie Munger, the right-hand man and investment partner of legendary US investor Warren Buffett.

More macro control will widen the gap between Shanghai and real global financial centers.

And the market may require a long journey to find its floor.

In fact, the keys to reversing the market and pushing ahead with financial reforms are less intervention and better corporate governance.

A shares may continue to trade sideways or trend downward for the rest of the year if government intervention stays.

Most investors would then want to sell, given that many stocks have yet to resume trading.

HSBC Holdings (00005.HK) had already been listed for over a decade during the market bubble in 1973.

The bank survived the 1997 financial crisis.

It was not until 2007 that investors could find other quality stocks more attractive than the bank.

That proves there are always good and bad stocks during different market ups and downs.

While bad stocks will be washed away in a market downturn, good stocks will continue to outperform.

This “crisis” is less severe than previous ones, but it may last much longer.

Investors should be patient and gradually accumulate some good stocks.

This article appeared in the Hong Kong Economic Journal on Sept. 9.
Translation by Julie Zhu

[Chinese version中文版]

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Columnist at the Hong Kong Economic Journal