I never like commenting on stocks in a weekly column. But since the Chinese-language business press is inundated by negative comments about the domestic stock market, and many of them wrong, I must state my views.
Many investors are unhappy. The Shanghai Composite Index, the main stock index for the Chinese mainland market, has remained at nine-month low the past week.
For retirees and housewives who withdrew their personal savings in mid-2007 to invest in mutual funds, the loss has been enormous - the market lost more than 40 percent of its value as measured by the Shanghai index.
It has fallen from more than 6,000 points to around 3,500, as scary forecasts spread in China and overseas, the worst suggesting a further drop of another 1,000 points.
If that comes to pass, it would be a major correction indeed. It would mean almost all investors who entered the market last year would see a loss at the end of the year. Investors who had entered the market earlier would have withdrawn to keep their gains.
Small wonder that commentators, for the sake of their own investment prospects or concerns with society's general mood in this Olympic Games year, are calling on the government to somehow boost the market, if not an outright emergency bailout program.
At the same time, a few people are courting mass condemnation by suggesting the government should not interfere, if the stock exchange is to remain at the realm of the invisible hand of market forces.
Both sides are missing the point. Like it or not, every government interferes with the economy. The only difference is that there are times when it is easy to do so, and times when it is not.
Trading in stocks becomes less brisk when it is difficult for people to get loans. For some time now the Chinese central bank has been tightening the credit line, to first cool down the boom in fixed asset investments, and then to ward off inflation.
It must do so as the worldwide rise in food and energy prices is giving the authorities a tough time easing the burden on consumers.
But when people are protected as consumers, they cannot enjoy that same protection as investors. The government cannot afford to lift the credit floodgate, so that people can keep gaining from the stock market and fuel even more price rises.
People can adapt to changes. But in an economy, the adjustments are often painful and some individuals can be badly hurt. These adjustments, no matter how imposing they may seem, are ultimately because of changing conditions, or the invisible hand.
The pain that is being felt in the Chinese economy has nothing to do with the government's lack of "investors' education" of the potential risks embedded in stock markets - which may also be seen as a kind of interference.
Nor has it to do with the government's lack of enthusiasm in keeping investors happy in the year of the Olympics. When changes appear, the economy's priority is to make adjustments to adapt to the changes. Pretending that nothing is happening is bad policy.
And to make people feel nothing is happening, usually by spending money in foolish ways, is an even worse policy.
If the government adopts such mistaken policies, it would be a good reason for global investors to worry about a replay of the so-called post-Olympic bust (seen in previous Olympic hosting countries).
But if it can focus on the economy's long-term strength, the domestic stock market will regain some of its value more easily - after the Olympics.
E-mail: younuo@chinadaily.com.cn
(China Daily 03/31/2008 page4)
