China’s economy has succeeded through trial and error – and the country's recent stock-market collapse should be viewed as part of that process, to be used to drive the next phase of economic reform. One key lesson is that Chinese stock markets remain structurally biased toward state ownership and guidance.No, China is not going to implode.
Though the blame game is ongoing, the historian Charles Kindleberger’s 1978 book Manias, Panics, and Crashes offers the perfect explanation for what China is experiencing. The economy has undergone a standard cycle of displacement, overtrading, monetary expansion, discredit, and revulsion, all in a matter of less than 12 months.…This episode proved, once again, that highly leveraged markets are unstable and unsustainable. Financial crises have repeatedly been spawned by inadequately regulated financial innovation, with the combination of market greed and regulatory silos and blind spots enabling booms and busts.
Enter the Austrians.
In China’s case, the government interventionist approach is exacerbating the problem. Though market intervention may limit the scope of losses in the short term, it undermines markets’ ability to self-correct, not to mention the credibility of the Chinese authorities as neutral regulators.Comes the walk back.
The problem was that retail investors were not equipped to judge the valuation of listed companies like Alibaba, yet they could use margin loans to engage in speculation. This was a dangerous combination – one that would have led to socially unacceptable losses to the retail sectors had the government not intervened.
Project Syndicate
China’s Live Stress Test
Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong, member of the UNEP Advisory Council on Sustainable Finance, former chairman of the Hong Kong Securities and Futures Commission, and currently an adjunct professor at Tsinghua University in Beijing, and Xiao Geng, Director of the IFF Institute and a professor and senior fellow of the Asia Global Institute at the University of Hong Kong
China’s Live Stress Test
Andrew Sheng, Distinguished Fellow of the Asia Global Institute at the University of Hong Kong, member of the UNEP Advisory Council on Sustainable Finance, former chairman of the Hong Kong Securities and Futures Commission, and currently an adjunct professor at Tsinghua University in Beijing, and Xiao Geng, Director of the IFF Institute and a professor and senior fellow of the Asia Global Institute at the University of Hong Kong
4 comments:
They are very bitter Tom ;)
Once again, this time in China, Adam Smith proves he got it wrong capitalist economies are not self-equilibrating!
One of the problems in Chinese equities, or maybe the problem, is that margin was not controlled. The shadow banking system was making margin loans, in addition to the banking system.
Margin in equities exploded to historically over the top highs. This was a classic leverage bubble.
The authorities had to put a floor under the market to protect unsophisticated speculators and prevent the wealth effect from deteriorating so much as to affect the real economy.
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