Monday, August 06, 2018

Targeted Measures Necessary for A-share Problems Amid Trade Tension
By Li Qiaoyi
Global Times
2018/8/6 22:23:40

A sustained downward spiral in the shares of companies listed on the Chinese mainland, which has largely bucked the global upswing led by US shares, has intensified worries in China's financial market about the impact of a protracted trade war.

Taking into account broader concerns about the yuan's weakness and peer-to-peer lenders' defaults, it's high time that regulators devise more targeted and effective measures to restore investor confidence and prevent systemic risks from building up.

Words of encouragement, which everywhere in the media, won't be enough to assuage investor anxieties over risks emerging on multiple fronts amid the trade war.

There has been a continued bleed in the mainland equity market since US President Donald Trump's March 22 announcement that presaged broader tariffs of up to $60 billion per annum on Chinese imports and sounded the alarm over a trade war between the world's top two economies.

By the close on Monday, the benchmark Shanghai Composite Index had lost 17.11 percent since Trump's announcement. Just in the past week alone, the index fell 4.63 percent.

The two other major indexes, the Shenzhen Component Index (SCI) and the tech-heavy ChiNext Index, have experienced even heavier losses - a 22.56 percent fall thus far in the former since the start of the trade conflict and a drop of 20.71 percent in the latter's case.

In terms of weekly losses, the SCI fell 7.46 percent over the past week and the ChiNext Index booked a loss of 7.08 percent.

The bleeding on mainland stock markets contrasts sharply with an overall uptrend in US stocks. The Dow Jones Industrial Average edged up 0.54 percent to end last week at 25,462.58 points, well above its March 22 closing level of 23,957.89 points. Two other major US stock indices - the tech-focused NASDAQ and S&P 500 - gained 9 percent and 7.44 percent, respectively, during the same period.

More strikingly, contrary to a frustrating July for A-share investors, most other global stock markets have been in good shape since July. The obvious exception is Hong Kong, where shares have spiraled downward since June.

With the continuing fall in mainland stocks, there have been many pieces written about the economy's sound fundamentals, which together with unswerving reform efforts are seen as putting the mainland market on the path to a brighter future. What's missing is a sincere effort to identify why mainland shares have done so poorly.

That doesn't mean the government should intervene to rescue stocks, but it does mean there's a need for action to keep retail investors from falling victim to a market where loopholes and defects persist.

In a prominent sign, a scandal at major vaccine maker Changsheng Biotechnology Co, which was uncovered in late July, didn't just deal a deadly blow to the company's shares. It also hit healthcare shares in general, precipitating the fall in mainland stocks.

Institutional investors and many individuals who hold shares in the company apparently have no choice but to put up with losses they weren't supposed to bear.

This "black swan," as well as many cases where major shareholders offloaded their stakes, often at peak prices, indicates an inefficient regulatory framework that has yet to level the playing field, especially for retail investors. These investors can easily lose their shirts, no matter how carefully they choose their shares.

On August 6, 2008, exactly 10 years ago, the Shanghai index finished up 1.06 percent at 2,719.37 points. By Monday, the index shed 1.29 percent to close at 2,705.16 points, just slightly below the level it stood at a decade ago. The Dow Jones Industrial Average, for its part, has more than doubled from its 2008 level.

The numbers speak for themselves and ignoring them is not an option.

On top of that, the slide in the yuan that has seen the currency heading toward 7 yuan per US dollar, as well as a worrying number of online peer-to-peer loan defaults, together constitute a wake-up call for the authorities to emphasize real solutions to the underlying problems in China's financial markets.

The latest example of the government's awareness of timely action to contain financial risks was the central bank's announcement on Friday to raise reserve requirements for foreign exchange forwards settlements from zero to 20 percent. Buoyed by the move, the yuan strengthened against the US dollar on Friday.

That move, and more fundamental efforts such as an announcement in late July by the securities regulator that adds actions threatening public health to factors considered in suspending or delisting shares, still can't fully ensure financial stability. Targeted measures against fundamental problems are urgently needed. If not now, when?

The author is a reporter with the Global Times.
Newspaper headline: Targeted measures necessary for A-share problems

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