China’s intervention in the stock market doomed to fail

There is another standard doomsayer’s article in the Today paper on 13 Jul 15 with a title, ‘Is China’s use of state control, money to stem stocks rout doomed to fail?’ When I look at the author, Tom Mitchell, Gabriel Wildau and Josh Noble, I can guess the answer. This kind of China bashing literature has been flooding the western media and our local media for decades.  China is doomed to fail in everything it does. There is nothing clever or sustainable in what the nerds and backward and unintelligent leaders in Beijing could do right. China is full of flaws and the economy is waiting to collapse. And the intervention in the stock market is another unthinkable thing to do. Bound to fail.

In the meantime, for the last 40 years, China quietly plod along, growing from strength to strength and is now the biggest economy in the world in real purchasing power terms, overtaking the USA. How could these foolish Chinamen do this? Unbelievable, cannot be true. China must be doctoring their numbers to bluff the whole. They are all fools. Just wait for the collapse to come.

Unfortunately in the case of this monetary intervention by the Chinese govt in the stock market, I must agree it is a silly thing to do. They cannot hope of artificially propping up a market by throwing money at it and think it will work. It is unsustainable if the fundamentals are wrong. Any PE of above 40 or 50 times is questionable. If there are a few exceptions, it is understandable. But for the whole market, for all the stocks to have such high PEs, in the hundreds, how can it be sustainable?

The Chinese may be banking on their huge surplus and a huge population turning investors against a small number of stocks. Even these factors may be abnormal relative to the rest of the world, but still the enormous PE cannot hold. The general PE in the market may tolerate a few more points higher than international norms, but when it is at a ridiculous level, it must come down.

State intervention is not a flaw per se. State intervention is necessary under the present market condition when there are big boys manipulating the market. The manipulations by the big boys are not different from state intervention. The criticism by the analysts against state intervention is as flawed as allowing the big boys to do what they want in the market with their huge war chests. The big boys are also intervening in the normal functioning of the market. They are not the real market forces by an oligarchy out to manipulate the market to their favours in the guise of free market forces.

Without state intervention, the small investors would be at the mercy of the big boys and their intervention to reap them off. The big boys could push up the market or whack the market down to the abyss.  They are demanding that govt and stock exchange regulators stand aside and let them do as they pleased. And state intervention is unacceptable but their intervention is acceptable, normal and good for the market.

State intervention is now a necessity in a market dominated by the big boys. Without state intervention, the small investors would be at the mercy of the big boys and turned into gun fodder. States and govts must be strong enough to intervene in the stock market to balance against the big boys rigging the market in their favour.

What is wrong in the China intervention is to prop up a market that is already too high with very high PEs. China better think twice and change their strategies to something more down to earth and more real, if they want their markets to function normally in the long run. This short term intervention must be unworn in a matter of time. Yes, this intervention is doomed to fail and will cost the Chinese govt heavily in financial terms.