Chinese stock markets have bucked the trend in the rest of the world by posting a decent day yesterday and a great day today. Yesterday the SSE Composite rose 0.8%, and today it rose another 3.7% to close at 1928. I don’t think the rally was caused by good economic news – today’s data release showed October’s industrial production up a surprisingly low 8.2% year on year, although yesterday’s retail sales were in line with fairly high expectations, of which more later – so much as good technical news, or rather a rumor that has caused a certain amount of “technical” excitement. According to an article in today’s Economic Observer, one of the local papers I read regularly:
An anonymous policy recommendation calling for an RMB 600-800 billion fund to buy up mainland stocks in the event of a market crash has made its way onto the desk of top banking officials. The report, which included three pages of discussion and a two-page list of target shares, was first sent using an anonymous internal email account to a mailing list at the Research Center of International Finance (RCIF), under the Chinese Academy of Social Sciences, on October 30. It was later submitted to top banking officials as policy advice, the EO learned.
It suggested the government use such a fund to unconditionally buy shares in 50 heavyweight firms listed on the Shenzhen and Shanghai exchanges if the Shanghai index hit 1,500 points. The RCIF's director Yu Yongding confirmed the authenticity of the report. According to a researcher at the Center, the report was well received by the financial industry, and the Center had so far received much feedback. Banking officials had long considered establishing such a fund, he added. According to the report, in extreme cases, the stock market might drop between 800 and 1,000 points, when rescue measures from the government would be meaningless. To effectively prevent panic selling, the government should take action if the index approached 1,500 points, it suggested.
By its estimate, RMB 930 billion would be needed to buy all circulating shares if the index reached 1,500. But, it added, buying one third of the total circulation would be sufficient to bolster the market, which would cost RMB 300 to 400 billion. Based on these calculations, the report then suggested that the government establish an RMB 600 to 800-billion stabilization fund.
For nearly a year there has been talk of using stock market stabilization funds to halt the collapse of share prices. Chinese regulators, to their credit I think, have pretty steadfastly rejected the rumors and denied they had any intention of doing so. Officially they have argued that this kind of intervention would seriously set back the development of the stock market as an efficient allocator of capital, and unofficially a lot of people have worried about the opportunities for manipulation and conflicts of interest.
I have no idea if the most recent proposal is likely to have more traction, but Chinese investors certainly seem to be “buying” the rumor. Whether they subsequently sell the fact we will have to wait and see. By the way, as a total aside, for those who are skeptical about how modern our modern financial experiences really are, I found the following quote in the first dialogue of Jose de la Vega’s 1688 classic work on the Amsterdam Stock Exchange, Confusion de Confusiones, “The expectation of an event creates a much deeper impression on the exchange than the event itself.” This I guess is the 17th century version of Wall Street’s “Buy the rumor, sell the fact.
