Not for the first time stock analysts have to proof they know what they are talking about when they address the booming Chinese stock markets. Watching those analysts is costing quite some time and energy and you have to wonder whether they add much value. I have been expressing my amazement about their teachings more than once.
The Chinese authorities have been issuing last week more stern warnings to the investors, telling them that what goes up, might also come down. On top of that on Friday they have been announcing some macro-economic measure, like raising lending and deposit rates and widening the trading band of the Renminbi. The analysts were is disarray.Some predicted that market will crash on Monday. Others said there was no reason to expect a crash, at most a correction. I think it is not enough to really make a serious impact.
Fortunately, we noted also the comments of Hu Shuli, the chief-editor of the famous financial magazine Caijing. Hu's comments make sense for two reasons. First, she has an intimate knowledge of China's financial industry, something we cannot blame many foreign analysts for. Second, Hu is rather close to the policy makers and what she suggests might already be part of a growing internal consensus, or is at least part of the internal debate.
First, she pleads for a drastic change of the interest for deposits. Now inflation is three percent per year and deposit rates are at 2.4 percent, effectively punishing those who keep their money at the bank. No way people are going to keep their money in the banks when it is melting away. Hu says, correctly, that increasing the interest rates is especially important for the people with a small budget. They might not dare to stay in the stock market when a correction occurs, while the richer investors might just decide to sit it out. Now, Chinese citizens see a bank deposit hardly as an alternative. It might need a rather drastic increase of the interest rates to cause a reaction.
A second point Hu Shuli is making might be even more important. The financial authorities at the China Securities Regulatory Commission (CSRC) have been relying too much on educating the investors and have not done enough to curb illegal activities, Hu says:
Statements such as “there are some cases of illegal operation” in the CSRC notice are too mild. Among those who are active in the market, not a few have problems with conflicts of interest. In some institutions connected with security exchanges, almost everyone trades stocks, and these institutions basically fail to function near the close of a stock-trading day. Trading stocks during working hours has become a “normal” phenomenon. Some relatives of employees of institutional investors even boast publicly about how they make money based on insider information.
Those both measures, when done in a rather rigid way, could cool down the current crazy without triggering off a major crash. That would be in the interest of all involved, apart from those playing illegal games at the markets.
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