Restore confidence in stocks

A stock indicator shows the benchmark Shanghai Composite Index on Jan 21, 2016. [Photo/IC]

The plunge of shares on Tuesday, which sent major domestic indexes to a 14-month low, should galvanize policymakers' resolve to arrest the dangerous and persistent pessimism about the Chinese mainland's stock markets.

Despite the absence of any significant domestic news that could have surprised investors, the benchmark Shanghai Composite Index dropped 6.4 percent to its lowest point since late 2014.

While investors are desperate to figure out the possible causes, which range from China's economic slowdown, fluctuating foreign exchange rates, plummeting international oil prices and higher US interest rates, their fears about a free-fall in the Chinese mainland's shares are erupting into near-panic now.

Admittedly, policymakers have time and again taken measures to stabilize the volatile domestic stock markets since last summer. But not all of these measures have been well-thought through.

For instance, the steep and fast plunge of the stock markets at the start of the year gave rise to concerns about the effectiveness of newly adopted "circuit breakers", which were intended to reduce the volatility by imposing trading halts when the stock markets plummeted suddenly. As a result, securities regulators had to abandon the new mechanism.

Worse than such hasty regulatory actions is the sort of indifference exhibited by some officials who have shrugged off major market fluctuations by pointing to the fact that the Shanghai Composite Index still rose 9 percent last year.

The latest rout should bring an end to any illusion that the Chinese mainland's stock markets are still okay. Instead, the increasing fragile investor sentiment represents an urgent call for a thorough regulatory review to identify and fix the underlying problems that plague them.

By doing so, policymakers can restore the confidence of not only domestic investors but also their counterparts around the world that have been repeatedly shocked and often over-reacted to the plunges of the Chinese mainland's stock markets.