In the first week of the New Year, the freshly installed circuit breaker of China’s stock market went into effect four times in 2 days. Pretty efficient and just in time right? Not exactly.
As the stock market circuit breaker became the new hot word among Chinese netizens and individual investors, the newly minted system meant to protect the market was put in place quickly, and then withdraw quickly, as the government viewed [it] as something too risky and not “protective” enough.
While the circuit breaker is not exactly something in accordance with a pure market economy, and the system’s protective power and cooling effect was utilized in the United States successfully, its application turns out not that effective in the Chinese stock market, which is a question on everyone’s mind these days.
When Thomas Edison invented the circuit breaker 120 years ago, it served a needed purpose and therefore it is still in use today. Thirty years ago, when U.S. Treasury Secretary Nicholas Brady applied the concept to the stock market, it helped with cooling and calming down investors faced with drastic changes in stock market. The cooling off effect is temporary though, as no one knows if the stock will continue to tumble the next day.
That uncertainty makes the Chinese government decision makers uneasy though, they were probably thinking about a panacea that can safeguard the market no matter what condition it is in. Well, they underestimated the problem of the Chinese stock market and, when the Shanghai Stock Exchange had to halt the trades after only 29 minutes, a “miracle” was created in the 25 years of history of China’s stock market.
Some analysts believe the threshold China set is too low to be practical (it’s set at a halt of 15 minutes if the fluctuation is more than 5 percent, and halt for the day if over 7 percent), compared with a U.S. threshold of 20 percent. The point is, if the threshold is to be lifted to 10 percent, 15 percent, or 20 percent, would the current regime have the confidence and tolerance for such huge fluctuations? Given the withdrawal of the mechanism after only a few days of implementing it, the bottom line of the government seems quite fragile, and there has got to be some deep down secrets of which the outsiders are not aware.
It’s widely rumored that Xiao Gang, Chairman of Chinese Securities Regulatory Commission (SRC), was under tremendous pressure and his position became shaky. To be fair, no one should blame Xiao for the mishaps of the Chinese stock market. If the U.S. stock market crashes, Obama is in no authority nor power to summon U.S. SEC chairman for questioning and scapegoating. Instead, Obama would probably ask the SEC chief for advice and guidance under such circumstance.
The conundrum stems from the fact that the Chinese stock market is merely an extension of the political battlefield, and the chaos in the stock market is a reflection of the power face off at the highest level. Chinese government accuse those who short Chinese stocks and RMB as “hostile,” well, would anyone find a voracious investor “benevolent” anywhere?
For those who are hostile to Xi Jinping’s reform efforts, especially those from the Jiang Zemin era, who have amassed a huge amount of wealth and are now facing retribution, they would indeed do anything to stir up and demolish the stock market as a way to protect themselves, and one can call [those] acts “hostile” for certain!
The introduction and trial of circuit breaker in China seems to be a complete failure at present. But this very action could one way or another make the Chinese market worse off.
With the breaker in place, the government may feel safe and comfortable, and will be less likely to remedy the current situation of systematic flaw in the system. But with the circuit breaker absent, that could be dangerous to China as well, just as a circuit without breaker could avoid the often disruption of power supply, but will foster greater calamity when the circuit can’t hold the current in really dangerous situation. This is exactly what could happen to the over-heated Chinese stock market today.
The government knows for certain that, with or without a circuit breaker, the eventual collapse of the market will all be inevitable, as everything is ultimately political in China, and not only the stock market is unsafe at the moment, the debt market and many sectors of Chinese economy and Chinese politics are all in need of a breaker and a change in its overall structure.
Frank Tian Xie, Ph.D., is a John M. Olin Palmetto professor in business and associate professor of marketing at the University of South Carolina Aiken.
