China want to guarantee "rational pricing" of stock market via regulatory jawboning
Moral hazard fears may be undermining property rescue. Top Chinese economist says Friedrich von Hayek needs heeding.
Our briefing on key economic and financial developments in China as of Tuesday, 19 November, 2024:
China’s securities regulator has responded to a recent frenzy in the stock market with a new directive that mandates “rational pricing” by market participants.
Xu Gao, chief economist at Bank of China’s investment banking subsidiary BOC International, points to need to heed both Austrian economist Friedrich von Hayek and John Maynard Keynes when it comes to matters of government intervention in the market.
Xu also contends that a fixation on moral hazard on the part of regulators may be undermining efforts by China to rescue its own ailing real estate market.
China wants to guarantee "rational pricing" of stock market via regulatory enforcement
The Chinese government wants to ensure that equity pricing remains "rational" and accurately reflects fair market value, with the release of a new set regulations in response to a recent stock frenzy following the announcement of stimulus measures.
On 15 November, the China Securities Regulatory Commission (CSRC) released the "No. 10 Listed Company Regulatory Guidance - Market Valuation Regulation" (上市公司监管指引第10号——市值管理).
The new directive calls for "driving the investment value of listed companies to rationally reflect the quality of listed companies based on actual conditions."
The directive also contains specialist requirements for regulation of the market value of the constituent companies of key stock indices, and companies that have sustained long-term losses.
The move from China's top securities authority arrives after a surge in Chinese share prices that followed the unveiling of monetary and fiscal stimulus measures at the end of September.
2024 has also seen a record number and volume of share buy backs, as well as dividends tap unprecedented highs, as China's regulators seek to shore up the health and reputability of the country's capital markets.
CSRC has long said that it hopes to improve the "quality" of China's listed companies, in a bid to attract more investment and make the country's capital market are more efficient and effective means of large-scale financing.
In addition to mandating pricing of shares that "rationally reflects investment value," the new directive also:
Calls for “raising operating efficiency and profitability on a foundation of increases to the quality of listed companies.”
Clarifies the duties of company boards, directors and senior executives. CSRC has required that "boards focus on increases in the quality of listed companies," and that "all major decisions and specific work should take the interests and returns of investors into full consideration."
Encourages controlling shareholders to use share increases and other methods to "invigourate market confidence."
China should listen more to Friedrich von Hayek to solve its economic problems: Bank of China’s Xu Gao
A leading economist from one of China's big state-owned banks says the nature of government intervention in the Chinese economy is a key source of the problems that the country faces at present.
"The reason for some of the problems and difficulties that China's economy has encountered is failure to effectively handle the relationship between the government and the market," said Xu Gao (徐高), chief economist at Bank of China's investment banking subsidiary, BOC International.
Xu highlights the early 20th century debate between Austrian economist Friedrich von Hayek - a leading advocate of the efficacy of the free markets - John Maynard Keynes - a pioneering advocate of government intervention in the workings of the market - as addressing the crux of China's current economic dilemma.
"Hayek opposed government intervention in the market, believing that even when economic crisis occurs, if government artificially creates demand, this will definitely lead to some mistaken allocation of usable resources, which could show the seeds of further disturbances and crises," Xu said.
"For this reason, Hayek advocated that government refrain from intervening even in the case of crisis.
"Keynes held a completely different viewpoint, believing that the long run is a misleading guide to affairs, as in the long run we are all dead.
"In other words, he advocated living in the short-term, and that we cannot wait for the market to spontaneously restore itself to effectiveness.”
Despite the differences between Hayek and Keynes lying at the core of disputes over economic ideology in the modern era, Xu Gao considers their fundamental positions to be similar.
"Both Keynes and Hayek did not consider it possible to replace the market with the government - they both believed that the market should occupy the fundamental position."
According to Xu, the key difference between the Hayek and Keynes lay in their convictions concerning the level of efficiency of the market, with Hayek considering it efficient enough to rapidly adjust to crises, and Keynes believing that it lacked the efficiency to recover with sufficient speed, necessitating government intervention in the form of demand creation.
Xu made the remarks during a speech delivered on 22 September at Peking University that was recently published by state-owned media.
The publication arrives during a fraught time for China's economy, with plans for a 10 trillion yuan government stimulus package now waiting in the wings to help deal with ailing growth and a moribund property market.
As Beijing potentially gears up to unleash trillions of yuan in stimulus spending, however, Xu appears to advocate the importance of Hayekian-balance to any mass Keynesian intervention on the part of Beijing.
"From my perspective, the key is to look at the state of the market when dividing the market and government," Xu said.
"If the market is operating well, there is no need for the government."
Fears of moral hazard undermine China’s property rescue efforts
While making the case of heeding Friedrich von Hayek’s viewpoint under certain conditions, Xu Gao also called for greater intervention in the market under others.
Xu directed criticism at Chinese regulators for over-caution when it comes to the moral hazard consequences of bailing out the long-ailing property market.
He highlighted the need the throw moral caution to the wind on certain occasions when the health of the financial system is in genuine peril.
Xu pointed in particular to the wisdom of the US Federal Reserve's emergency measures last year, when it was confronted by a crisis of financial institutions whose bond portfolios were hard hit by the Fed's own interest rate hikes.
"In March 2023, when Silicon Valley Bank in the US shut down, US commercial banks markedly contracted credit extension as result of its impact, and financial markets succumbed to turmoil," Xu said.
"The US Fed's large-scale asset expansion had the goal of stabilizing markets to traverse the crisis.
"The Fed's methods were extremely wise, and broadly praised. If markets suffer from problems, government must intervene - this has already become the consensus."
Xu questions, however, whether China's authorities are demonstrating similar wisdom and prudence with its own ailing property market, given an overweening preoccupation with the moral hazard that bailout measures could create.
"In recent years, China's market rescue mentality has always become entangled in the matter of moral hazard."
“If a child were to fall into the water and adults watched by the sidelines to teach the child a lesson, this would be absurd.
"It's necessary to first save the person by any means, then consider how to prevent moral hazard in future."
"The real estate market has fallen into the water, and before staging a rescue, many people have already become entangled in discussions about moral hazard.
"I believe we should save the market first so that it can come back to life....this is far more important than any disputes surrounding moral hazard."