A shares to re-embark on surging trends

By Yi Xianrong
0 Comment(s)Print E-mail China.org.cn, July 21, 2015
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With dangers from the stock market lurking, the Chinese government, at the beginning, overestimated its capabilities in managing the market, and chose to believe that it was capable of controlling and managing the risks to a reasonable range. The government failed to realize that this round of market frenzy, triggered by high-leverage financing, would likely lead to greater dangers or even an equity-market crisis when "deleveraging" measures were implemented. Although the government took a series of measures to rescue the market shortly after the tumble began, these measures produced very limited effects. Only when a full-scale crisis happened, did the government finally have to intervene with a heavy hand.

To rescue the market should be part of government's responsibilities. In any country, the government should be the final credit guarantor for the financial market, a kind of quasi-public product. At a time of crisis, the government is always obligated to guarantee market stability. After the financial crisis in 2008 in the United States, the US regulatory departments swiftly and resolutely adopted measures to limit tremendous risks of the stock market to the minimum levels, and resolutely prevented possible spillover and contagion, and made financial stability a priority. When the Chinese stock market continued to tumble and a crisis evolved, the Chinese government also had the responsibility to rescue and stabilize the market, so as to guarantee market stability and rebuild confidence. In the face of a crisis, it was therefore justified for the Chinese government to take measures to shore up and stabilize the market.

But the methods and degree for government rescue and intervention should be appropriate, otherwise they would be subject to suspicions and questioning from the market. Judging from the current circumstances, the Chinese government's market rescue measures are unprecedentedly extensive and resolute, and the main purpose was to stabilize the market and restore confidence. The government has realized that both the massive stocks rally and slump in the past year, to a great extent, were associated with the government's policies towards the stock market, the government's understanding about the nature of the financial market, the blind introduction of various financial derivative tools from the matured and developed markets, and a simple and blind comparison of the Chinese financial market to that of the US. After the restoration of stability, therefore, the Chinese government will probably have to seriously reflect, redefine and re-position the stock market, and these reflective measures are likely to serve as new driving forces for reforming China's stock market. Otherwise, after this round of government rescue measures, it will give rise to a speculation that the market-oriented reforms would be abandoned and the government will frequently intervene and meddle in the stock market in the future. Such a speculation will produce negative impacts on the reform and opening of the stock market. Therefore, it is widely believed that the government will likely deepen reforms so as to reassure the market players and dispel doubts and uncertainties. It is certain that the market-oriented reforms of the Chinese financial markets will continue and will never backtrack.

Despite this unprecedented slump in the stock market, the Chinese government's strategy in developing the equity market was not changed, and the government will continue to foster a healthy development of the stock market through applying market-oriented reform policies. Therefore, the surging trend in the Chinese stock market will continue in the second half of the year. From the point of view of the government, as long as the economy is still in the process of struggling to return to the road of healthy and sustainable path, the government will continue to drive up the stock market to aid the real economy, otherwise the economy will likely slow down further.

The author is a columnist with China.org.cn. For more information please visit: http://china.org.cn/opinion/yixianrong.htm

This article was first published at chinausfocus.com To see the original version please visit http://www.chinausfocus.com/finance-economy/a-shares-to-re-embark-on-surging-trends-after-turbulent-corrections/#sthash.uX7J19k4.dpuf

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