By BURTON G. MALKIEL at The Wall Street Journal
The biggest drop in Chinese stocks in eight years Monday is another sign that Beijing’s efforts to prop up prices have failed. Moreover, the interventions themselves have made China’s equity markets more volatile and damaged their credibility in the long run.
To stabilize stock prices, Beijing has employed numerous techniques, including suspending trading for a time on well over half of listed A-shares. Short sales were banned, and major shareholders were prohibited from selling. New initial public offerings were disallowed.
China needs more professional participants in its equities markets. But why should institutions buy when the government can control if and when they can sell? And ordering state-owned enterprises and brokerages to buy stocks with borrowed money to shore up prices only reinforces the notion that the market is rigged.
Ultimately such actions increase risk levels and the required rates of return on equities. After all, it was the government’s encouragement of the public’s margin buying of stocks that contributed to the 150% increase in prices before China’s equity markets went south this summer.
The lesson from the stock-market instability is that continued economic growth will depend on continued economic restructuring, but growth will be compromised