Stock market maturity key to stable growth

BEIJING, July11 -- As a barometer for economic

soundness, the Chinese stock market has seen a continuous slump in recent years

and a large group of investors suffered losses in their investing accounts.

People cannot help asking whether such a slump suggests the economy is having

problems.

It is true that the Chinese economy witnessed a

high-speed boom for more than two decades and the Chinese stock market was also

among the most active markets around the world last year. However, the economy

and the stock market are both under intensive pressure from forces in and out of

the country at this moment.

The economy is still following a traditional model of

development popular in the economic takeoff in East Asian countries: an economy

relying heavily upon the external demand. Under this mode, the government

imposes heavy influences upon the prices of productive elements in order to lure

direct foreign investment and keep the commodities competitive on the

international market with low prices.

Currently, such a mode is challenged by both the

shrinking demand and the rising prices of raw materials. The subprime crisis in

the United States and its negative influences have directly reduced the

traditional export market for China and other developing countries.

The price hike of crude oil and other industrial raw

materials is a direct consequence of global excessive liquidity and the

development of financial derivative products, which is much faster than the

economy.

The emerging market economies, including China, are

mostly export-orientated, so they are the primary victims of the shocks.

If the Chinese manufacturers still take the

international market as their primary market and keep their current investment

momentum, they might soon see their inventory raised and profit reduced or even

go red when the overseas market is weak and the prices of imported raw materials

rise.

That would be a typical "hard landing", a scenario

that happens when the economy goes directly from a period of expansion to a

recession.

Therefore, our target should be to slowdown the

economic growth gradually and achieve a soft landing, avoiding inflation, high

interest rates and a recession when the economy cools down.

To achieve this target, it is necessary for China to

speed up restructuring the industry and developing a sound financial system that

could resist external risks.

As to the stock market slump, it is partly a result

of the changes in the economic outlook across the world. The profits of listed

companies, many of which are export-orientated, are sure to dip because of the

global economic slowdown.

Of course, other elements within the country were

also adding pressure to the capital market.

The tight monetary policy, which could not be

loosened because of the excessive liquidity, the high inflation pressure, the

huge inflow of speculative money and many other reasons, is not going to be

changed in the near future.

The stock market itself is also under reform for many

of its long-term ills have not been eliminated. Facing so many negative

influences, the stock market can easily fluctuate dramatically.

As a matter of fact, a mature stock market should not

only be a place for corporations to get financing. More importantly, it should

be a place to create wealth.

With trust, investors put their money in the listed

companies they choose in the hope of sharing the companies' business returns as

shareholders. If their investment could not bring them rewards, or their rights

of benefiting from such investment could not be guaranteed, they would

definitely quit the market. The stock market might not function well for

financing listed companies.

The authorities should encourage more profitable

enterprises to get listed in the market, including the private businesses.

Meanwhile, those listed companies with poor performances should be kicked out of

the stock market under prudent regulations.

Only when the stock market functions well, it would

serve as a strong support for economic restructuring, which is necessary to

upgrade China from an export-orientated trade power to an economy pillared by

domestic demand with sound and fast growth.

Another important mission for the authorities is to

enhance the regulation of all market players, including investors, listed

companies and financial institutions, so that they could not manipulate the

market to their own advantage.

All these measures are only part of the solutions to

develop the stock market into a more mature system. They are indispensable

though sometimes painful or time-consuming.

There were calls for the government to take measures

and prop up the stock market. Such a "bail-out", effective in lifting the index

points, may not last. And it could bear long-term negative influences to the

market.

The investors might feel confused about their

investment decisions when the government, instead of the market, tells them

where the stock price should go or where the investment risks lie. And the

investors might even drop their own judgment and try to follow the government in

their investment. It may lead to a market failure, which is obviously dangerous

for the capital market as well as for the economy.

Therefore, a mature internal system for the capital

market involving market players is what we need most urgently to prepare for a

new round of prosperity.

(The author is a professor of finance at the School

of Economics, Fudan University)

(Source: China Daily)