China intervention in market rout

China was forced to intervene in the stock markets following the recent sell down, wiping trillions of dollars from stocks and with many late entries suffering painful losses. The first day of intervention was quickly reversed and the rout appeared to continue to run to the abyss. China went in with more restrictive measures yesterday and for the moment has temporarily halted the fall and turned around with the biggest one day gain of 5.8% in the Shanghai stock market.

The measures introduced include halting trading of 50% of the stocks and forbidding big shareholders to sell their shares. Investigations are going on to look at malicious trading that contributed to the plunge in the market. Though the measures avoided a free fall and more losses, some market analysts as usual have started to express concerns about state intervention and not allowing market forces to do the damage.

What are these market forces? There will be the natural herd instinct, the panic buying and selling of investors at any sign or news that would affect stock prices. What is more dangerous is the collusion of big players, big funds, working in tandem to drive prices up and down at their callings. These are not the innocent market forces. These are big market manipulators. They operate as a wolf pack and reap great profits from the innocent small investors.

All the western modelled stock exchanges that allowed big funds to trade in them are faced with this risk of wanton manipulations. How can this be classified as market forces? These are not your normal investors but bandits that used their muscles to muscle in and out of a market like a bull in a China shop.

The only way to counter and prevent these big players from destroying a market and the wealth of small investors is to have a counter force in the form of govt intervention. It is only fair. Only silly govts and stock exchanges would think that govt intervention against these big forces is unacceptable and contrary to the operation of market forces. How can such big players and their irresponsible modus operandi to reap huge profits at the perils of small investors be allowed to run freely and unrestrained and be regarded as fair play, as market forces?

All govts and stock exchanges must have an instrument and even war chest to counter the destructive nature of the big players. Otherwise they are just being irresponsible and unfair to the small investors, like giving a licence to the big players to go for the kill, with their approval.

The Chinese intervention in the stock market is the right thing to do to prevent a very unfair and unlevel playing field. But what is important is also for the regulators and govt to manage a bubble and not allow a market to go wild. When a huge bubble is formed recklessly, the result will be a rout when the bubble is pricked. The Chinese govt must not let irrational exuberance to repeat again and for the present, how to unwind and deflate this bubble without causing too much damages. It was stupid to allow the market to run amok in the last few months and think that it was normal.

The volatility in the Shanghai stock market is not over yet and would take quite some time for the market to stabilize at a lower level.