China has been in the eye of the financial market storm since mid-2015. The country's onshore stock market floored in July last year, when it lost more than one-third of its value in just 30 days, and again in January 2016. The currency has also been volatile. The Chinese government devalued the renminbi in a surprise move in August 2015, leading to a 5% fall against the dollar.
Investors’ often amplified fears about China’s economic slowdown are part of the problem. But Chinese regulators also need to learn how to deal with investors, especially foreign ones, as they work towards financial market liberalisation.
When China’s stock market started freefalling in 2015, government regulators interfered heavily by suspending approved initial public offerings, freezing new share offers and making it illegal for large investors to dump shares. The global investment community was not happy. Market participants were even more disappointed when Chinese regulators briefly installed market-wide circuit breakers – a system that shuts down and closes the trading day if the market is down by a specific percentage – on top of the market’s usual daily price limit (stocks cannot fall by more than 10% per day) at the beginning of 2016.
Instead of assuaging investor worries, this double intervention emphasised Chinese regulators’ poor communication skills with the market and, significantly, their unwillingness to learn from previous slip-ups.
It is over-optimistic to think that Chinese regulators will change overnight. Their approach to financial markets is a product of a socio-political legacy and a present autocratic government that are fundamentally at odds with many other jurisdictions. But if regulators continue to ignore foreign investors’ reaction to heavy, arbitrary intervention, true financial market liberalisation seems unlikely.
On the other hand, international investors would do well to avoid headline-induced panic. It is true that China’s 2015 fourth-quarter gross domestic product growth at 6.9% is the lowest since 1990. But it is also true that China still contributes significantly to the world economy.
China’s financial market liberalisation will require a reality check on both ends of the spectrum: local regulators need to debunk the China’s-not-transparent perception through more communication with the market and less heavy-handed intervention, while investors would do well to not obsess over headline numbers.
