Characterizing the Chinese Stock Market - Professor Qing Wang
The recent stock market turmoil in China has alarmed the West and has put the economic and political credibility of the Chinese government on the line.
It is true that even though governments in Europe and the U.S. had undertaken measures to stop the stock price decline in the past, the scale of the recent intervention measures undertaken by the Chinese government has been unprecedented and breathtaking. But it is too early to draw any conclusions and to see the route as evidence of imminent collapse. After all, the Chinese government has tried and introduced many unique and even controversial policy measures in the past three decades of unprecedented economic growth, albeit in other arenas of the economy.
In the financial arena, post 2008, the Chinese government along with the rest of the world, becomes keenly aware of the pitfalls of the western financial system. Without a seemingly sound western model to follow, the Chinese government has to invent one through trial and error.
To read the recent stock market drama in China beyond its face value, one has to understand the characteristics of the Chinese stock market, which is in stark contrast to that of the west, not simply because it is a new hence less mature market and it is heavily regulated by the government. These are merely the manifestations of the characteristics of the Chinese stock market.
The characteristics of the Chinese stock market, which make it fundamentally different from the West’s stock markets, can be classified into three dimensions: the cultural dimension, the political dimension and the emotional dimension, and the intense interactions between the three dimensions.
The cultural dimension refers to the pervasiveness of the stock buying culture of the general public with little or no expert knowledge. Thus, the stock market’s ups and downs are affecting not only the relatively well-off population or the so-called middle class families of the country but nearly everyone on the street. The political dimension is the degree of government involvement and intervention in the stock market, which is a dimension mostly talked about in the West. Historically, the set up of Shanghai and Shenzhen stock exchanges in the early 1990s marked the final departure of the Chinese government from old communist ideology and mindset to embrace the very essence of the capitalist vehicle, along with private ownership of real estate and properties.
The emotional dimension is related to what behavioral economists call emotional finance - an emerging discipline in economics and finance, which is not based on hard figures and complicated mathematical modeling but on emotional and irrational behaviors of the stock investors.
Although all stock markets manifest to a certain degree irrational behavior as the recent financial crisis in the west painfully demonstrated. The Chinese stock market due to it ubiquitous nature of the stock buying culture, is even more volatile and unpredictable, and is highly vulnerable to exploitations of large institutional investors both domestic and international for personal gains.
The Chinese stock market plays multiple roles including:
1. Funneling funds, many of these are savings of the general public, to both state-owned enterprises and private start-ups as quickly and cheaply as possible to encourage entrepreneurship at national scale to combat slowing down growth and create more employment;
2. Keeping the China dream alive for the general public through investing in the stock market and having faith in the government’s ability to keep the economy growing and prevent the stock market from the western style collapse as seen in 2008.
The question in everyone’s mind, in the West at least, is whether the Chinese government is capable of achieving that. But one thing is clear, the rest of the world is in too much of a mess right now for anyone to feel smug and begrudge China in its determination to find a way and to be different from the rest.