The Decline Of The Stock Market Exposes Many Problems. The Perfection Of The Market Is Still A Long Way To Go.

Falling stock market is not a real crisis.

China

First, it increased by 80% in 10 months, and then dropped by 30%.

It's like going to Las Vegas for 21 points, winning 800 dollars first and then losing 300 dollars quickly.

In the end, players still earn 500 dollars, and they are unlikely to cancel the place they ordered in the steak restaurant before switching to McDonald's.

In most of the world's economies, the stock index's fall by 30% in just three weeks will undoubtedly be seen as a crisis. Of course, the recent collapse of China's stock market has also caused great concern in China.

As a matter of fact, I learned that the Zhongnanhai's family did not rest after the stock market crash, and studied the bailout strategy all the time.

However, in the final analysis, this is not a real "crisis", but a fire drills with panic and inspiration.

China's stock market is likely to stabilise in the short term.

Compared with the 2008 financial turmoil in the autumn of 2008 and the financial panic in Thailand in 1997, this fall in China's stock market is not a real crisis.

Why? First, compared with the United States and Thailand, China's stock market is much weaker than the domestic financial system. The core of this system is still commercial banks.

The relationship between China's stock market and the real economy is not very close.

In the first 5 months of this year, although the issue of new shares was intensive, the total stock market financing amounted to only about 4% of the total funds raised through the bond market and bank loans.

As for the impact on private consumption (private consumption accounts for 45% of China's GDP and the United States is 70%), the stock market decline is only equivalent to the 3%-5% that evaporates household wealth, which is a relatively high estimate.

Of course, people worry that the fall of the stock market will affect other sectors of the economy, but this effect is limited.

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Commercial banks, trust companies and securities companies that offer loans will be hit by the sharp fall in share prices.

However, according to my estimate, assuming that the stock index continues downward 20%, commercial banks generally lose 700 billion yuan, which accounts for 0.5% of the total assets of commercial banks, which is equivalent to the profit of commercial banks for several months.

During the 2008 crisis, the situation in the United States was completely different. At that time, many American companies were faced with the danger of not being paid on time.

Ford Motor Company is an example: it can't buy Wall Street commercial bills like usual to improve cash flow in Wall Street.

This is not the case in China because Chinese companies are relying on them.

Managing company accounts is not as complicated as Ford.

Did the stock market crash result in capital flight and exchange rate depreciation? Don't forget that China's capital account is not fully open, that is to say, Chinese investors can not easily pfer funds.

If that is not the case, China's foreign exchange reserves will be under tremendous pressure.

China's 4 trillion dollar foreign exchange reserve looks huge, actually the largest in the world, but it is still no match for the market value of the Chinese stock market at the recent high of 11 trillion US dollars.

The stock market's fall of 30% will easily consume most of its foreign exchange reserves and lead to a significant depreciation of the renminbi.

In reality, it is still difficult for Chinese investors to convert Renminbi into dollars or euros freely and pfer funds to other markets.

Therefore, unlike the Greek crisis, the fall in China's stock market will not have a lasting and significant impact on the global economy.

Does this mean that the Chinese stock market will collapse in the current round? It should not be so for the Chinese.

On the contrary, the crash has set a wake-up call for Chinese policymakers, suggesting that prudent regulation is needed in financial markets.

It is particularly dangerous for inexperienced investors to provide excessively generous margin loans, and we must resolutely put an end to them.

In addition, it also indicates that caution must be exercised in promoting capital account convertibility in China.

When we finally open capital account, we must formulate emergency measures to prevent the rapid outflow of capital.

Obviously, China's top leadership has been misled by technocrats and interest groups. They have always maintained that stock market prosperity is crucial to the success of economic reform.

This logic does not apply to the past 30 years and is still not applicable.

As mentioned above, China's stock market is still largely decoupled from the real economy.

It is an extremely dangerous game to support the stock market by providing cheap funds to inexperienced investors, many of whom only have high school qualifications.

How will China's stock market go next? Are Chinese policymakers able to control all kinds of risk factors? There are positive signs that the fall is under control.

On the weekend after the stock market plummeted 30%, China's top policy makers worked closely with technical officials to come up with a rescue plan.

On the first 3 trading days, the bailout failed, because the plan mainly relies on buying heavily.

And let small cap stocks stop and drain market liquidity.

Later, a plan similar to the approach adopted by the Hongkong government in 1998 came out - that is, to inject large quantities of liquidity into index futures to finally stabilize market expectations - when the government struggled against George Soros and its associates at the same time as airport shares and Hong Kong dollar (Soros).

The Hongkong government finally defeated Soros and made nearly 100% of its profits. Later, it returned the proceeds to Hongkong residents by listing the Tracker Fund.

This time it is unclear whether China's central government can make a profit, but with the support of the Central Bank of China and the existing capital controls, the Chinese government's efforts to stabilize the stock market have no reason to fail soon.

What lessons can we learn from the collapse of China's stock market? The lesson is: in order to ensure the stability of the stock market, listed stocks must be of high quality.

The reason for the rapid decline of the stock market is that many listed companies either make a profit or lose money.

Some companies, though profitable, rarely distribute cash dividends.

Many Chinese investors are accustomed to this. They regard the stock market as a casino.

The key to strengthening the infrastructure of China's stock market is the rule of law.

In other words, illegal companies and traders should be punished by law.

Unfortunately, the Chinese court system is far from having the ability to deal with securities fraud.

I have always proposed to set up a senior securities court and a procuratorial office in Shanghai to deal with cases related to securities violations.

The Chinese court system has deep regional color, and the local courts will take sides with specific objects. They often sacrifice the interests of shareholders to protect local listed companies.

In the absence of a sound judicial system, the Chinese stock market will never be as efficient and robust as Chinese investors and policymakers hope.

For China's financial system, the collapse of the stock market is like a frightening fire drill.

It not only tests the ability of the Chinese government to stabilize the stock market, but also exposes the fundamental flaw of China's stock market.

Obviously, there is still a long way to go for China to build the domestic stock market into a functional market.