Stock market slump will have only a limited impact on economy
- By Xu Hongcai
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E-mail China.org.cn, July 13, 2015
The government rescue measures include: the central bank promising ample liquidity for the stock market; securities brokerages pooling 120 billion yuan to buy stocks and promising not to offload before the Shanghai Composite Index rebounding to the 4,500-point mark; China Securities Finance Corp Ltd buying stocks of 30 blue-chip listed companies such as PetroChina Ltd, China Petroleum and Chemical Corp and the "Big Four" State-owned banks so as to stabilize the Shanghai Composite Index; and the China Financial Futures Exchange limiting single-day new orders on CSI 500 index futures to curb rapid plunges in the small- and medium-sized enterprise board. The intervention measures taken by the government are aimed at restoring market confidence. On the one hand, the measures will help guide retail investors to shift towards value-oriented investment, and on the other hand, no purchases in small-cap stocks were made in a bid to avoid the effect of negative incentive. Generally speaking, stocks have shown an obvious trend of differentiation, with investors preferring blue-chip stocks and small-cap shares under sell-off pressure due to over-speculation and fast rally in the past months. Investment is now gradually turning to blue-chip shares. It is believed that with short sellers losing momentum, the market will gradually stabilize.
At critical moments, governments would appropriately intervene in the financial markets to prevent risk spillover or financial crisis, and this has been proven to be a common practice and effective option for all governments in coping with financial crisis. During the 2008 financial crisis in the United States and the 2009 eurozone crisis, the US government and the European central bank all adopted the policy of active intervention, which helped mitigate economic losses incurred by the financial market turbulence. Of course, the intervention measures taken by the Chinese government this time were fairly restrained and well targeted — bolstering blue-chip stocks for an exemplary effect to restore market confidence and guide the reasonable flows of capital. At the same time, the government adopted different policies towards small-cap stocks so as to let the shares make self-correction and give investors a chance to learn the lesson. This will help investors cultivate and strengthen their risk awareness. On the other hand, reasonable declines in the prices of small-cap shares will help squeeze the bubbles and release risks of such stocks, and will be helpful for the future performance of such stocks.
In a word, the stock market turmoil will produce a very limited impact on the overall performance of the Chinese economy, and its impact on the global economy will also be very minor. After the stock market turmoil, the Chinese financial regulatory departments should earnestly draw their lessons, improve relevant laws, regulations and policies, better the financial supervision and management system, and elevate their capability in preventing and defusing financial risks. At the same time, investors should also draw a lesson from the stock plunges, improve and follow the concept of value-oriented investment, and become more rational and matured in their investments.
Xu Hongcai is Director-General of the Economic Research Department, China Center for International Economic Exchanges.
This article was first published at Chinausfocus.com To see the original version please visit http://www.chinausfocus.com/finance-economy/stock-market-slump-will-have-only-a-limited-impact-on-economy/
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