Date: 2015-07-28
Lack of transparency: Market mismanagement in China
I tend to think that China's real economic growth in the long run is likely to beat the mainstream economists' forecasts due to its abundant human capital, competitive culture, and various systemic supports at an unprecedented scale; These factors tend to yield positive surprises. I think highly of its resilience and long history as a civilization, and there is so much wealth to be unlocked. However, the government's ongoing market intervention is certainly a mismanagement, and it makes me be worried because I believe that any system dictated by a single dominant force is prone to the risk of not being able to avoid the worst case scenario.
Often, authorities seek to make themselves look better by hiding the data points that they think might discredit what they preach. Many times in history, this has backfired. The situation often turns against their favor because the market is not only greedy but also fearful. Policy making individuals, hence the institutions, seem to have a difficult time adjusting their expectations in different situations due to the inertia within their mind. When policy makers get used to prolonged bull markets, they seem to develop a tendency of thinking as if the market participants are only capable of imagining something better than whatever is revealed. However, when the market sentiment turns around, the opacity often works against the authorities' favor because the market participants tend to be foolishly fearful to an extreme degree.
While panicking, Chinese government already introduced one more lasting discount factor. Due to the selling ban imposed on the foreign-key shareholders of Chinese companies, regulation related liquidity discount is higher than otherwise. Although the impact of such a discount will not be evident due to many offsetting forces, it is reasonable to assume that a certain degree of additional discount persist on the hard earned valuation premium from whatever valid reasons. This beats the government's purpose of spurring the asset price and the wealth effect.
Independent thoughts and responsible risk taking are key to a healthy capital market, but the Chinese authority's recent steps undermine such values. I am surprised and concerned at its myopic approach and the investment/ speculation culture the government may unintentionally implant. Maybe this is the threshold of capitalism a communist system can endure. Or, maybe the current leadership challenge in the economic arena will make the Chinese Communist Party rethink about where its role ends.