China’s new stock market circuit breaker mechanism is so poorly designed that the stock markets have closed early on two of the first four trading days of 2016. China’s markets have been volatile and dysfunctional for a long time but this week has seen a whole new level of craziness.
The widely held belief in the competence of Chinese policymakers came under pressure last year after the disastrous policies to first blow a stock market bubble and then try to stop the crash, followed by the poorly communicated and hugely expensive adjustment of the RMB fixing process. Investors though have short memories when greed is involved, and there was a modicum of confidence reappearing at least around the stock market by the end of 2015.
Now that confidence has been totally destroyed by the boneheaded design and implementation of the circuit breaker mechanism. Even if policymakers now modify or remove that mechanism they have dug themselves such a deep credibility hole, domestically and overseas, that even in as populous a country as China there may be a shortage of suckers for stocks.
Why do the policymakers keep making such stupid mistakes? Were they never that competent but just looked smart because there was so much low hanging fruit? Is China’s economy such a mess now that they have no good options left? Or has the policy-making process broken down under the centralization of decision-making under Xi Jinping, the diversion of attention to ideological work with shades of “better red than expert” amidst a cadre cultural revolution, the exodus of experienced financial regulators to both better opportunities in China’s financial sector and interrogations in padded cells, as well as the suffocating pressure of Wang Qishan’s Central Commission for Discipline Inspection (CCDI) inspection teams that justifiably went into all the financial regulators and top financial firms after the stock market crash?
The Chinese government desperately needs to restore confidence. Capital outflows have increased dramatically, good luck finding anyone in China who isn’t looking at their finances now with the expectation of RMB devaluation, and even diehard stock market boosters are having a hard time crafting coherent justifications that are convincing to even the greatest of fools.
So what can Beijing do? Expect the taking of a symbolic scalp, likely that of Xiao Gang, chairman of the China Securities Regulatory Commission (CSRC), along with the embarrassing removal of the new stock market circuit-breaker. Perhaps Fang Xinghai, recently installed at the CSRC but still double-hatted with his position on the Central Leading Group for Financial and Economic Affairs, would be a good choice [1.8 Clarification: a good choice as the new head of the CSRC], but even those moves would be more symbolic than substantive.
Will Xi see this mess as a political opportunity to be used to his advantage, especially now that we are well into the jockeying for the 19th Party Congress expected in late 2017, or will this mess be used against Xi? Premier Li Keqiang is at least titularly responsible for the economy, and there has been speculation growing for months that he will be gone at the 19th Party Congress. Perhaps he needs to go before then, to be replaced by Wang Qishan. I know, highly unlikely, but markets would probably love that move, both because Wang understands finance and economics and because such a reshuffling might spur hope that the corruption and discipline crackdown would ease.
I would not bet on such a move, and so long as Xi is making it clear that politics, not markets, are in command (政治挂帅), the odds increase that the upcoming Year of the Monkey will turn out to be the Year of the Bear.
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