This is exactly what I was worried about. After a strong start this morning on the back or yesterday’s furious rally the Shanghai and Shenzhen stock markets suddenly turned negative and ended the day lower, with the SCI dropping by 0.71%. It is widely known among financial market experts that governments can have powerful impacts on the market by signaling their intentions, but the more often they do it by pure signaling (i.e. with measures that have no fundamental impact) the less credible their signaling becomes over time. In other words the more you intervene to control the market the more empty your intervention becomes – this is a weapon whose greatest power lies in the rarity with which it is used.
I suspect we may be about to prove this yet again. For the past year we have seen a whole series of interventions designed explicitly to manage market prices – and although they have worked well, they have done so with decreasing success. The market surged 9.3% yesterday when the tax authorities announced that they were cutting the stamp tax, but everybody bought just because they expected everyone else to buy. There was no real conviction.
And since the announcement provided no real change in the earning prospects for Chinese companies, savvy investors seem to have taken advantage of the event to shift their shares into the hands of the more gullible.
China Daily today quotes a man who trades stock at a Shanghai broker saying, in the midst of yesterday’s rally “I bet the market would undergo a strong rebound before the Olympics, and I will exit the stock market forever if I can make any gains then.
It is just too risky for ordinary people like me.”
He is probably unhappier than ever today.
If this kind of opinion is widespread, and I think it is, it bodes badly for the longer-term development of the stock markets.
