Equity market upheaval in China
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10 July 2015Anshuman Jaswal
The recent restrictions being placed by the Chinese government on trading in the Chinese market are creating an artificial barrier to the normal and efficient functioning of the market. The equity market is mainly a reflection of the structural economic underpinnings of the economy. If the economy and the firms in it are doing well, then the stock market would also perform well. If not, then it would be normal to expect a downswing in the market. By focusing on the equity market and not on the economy itself, the Chinese government might be ignoring some of the structural weaknesses in its economy that are creating the downward pressures in the markets. Creating an artificial bubble is normally not in anyone's interest, although an argument might be made that it has become more de riguer after the spate of quantitive easings and similar regulatory interventions in the aftermath of the financial crisis. Another issue that has been pointed out by some observers is that the weighting and role of Chinese stocks in leading global indices also becomes unrepresentative due to such interventions, and the index managers have to then weigh the balance of having such stocks against the imbalance created by having them in the index. Furthermore there is less incentive for the market participants to pick stocks on the basis of firm and industry performance, since the intervention seems to be keeping up the prices of stocks that would otherwise have been expected to not perform as well. Hence, there are several issues that can arise from such an action and it might be in the interest of Chinese regulators and the markets as a whole to reduce the level of intervention.