China's regulators need to crack down on stock market misbehaviour to avoid market turbulence striking the real economy, a researcher wrote in Monday's overseas edition of the People's Daily. The overseas edition of the ruling Communist Party's official paper often reflects official thinking but does not necessarily express ultimate government policy.
Li Yang, head of the finance institute at the Chinese Academy of Social Sciences, said the experience of the United States showed it was unrealistic to expect a stock market index to move in the same relatively smooth way as the larger economy. "So artificial 'adjustment' of the stock index is even more a violation of the laws of the marketplace," Li wrote.
He said regulators should focus on two tasks: strengthening oversight of the market and "strictly proscribing bank credit and funds from entering the stock market contrary to regulations". The authorities earlier this year punished eight banks for allowing loans to be channelled into the surging stock market, which has risen fivefold in two years.
Li urged strict information disclosure and an all-out attack on insider trading and other unlawful transactions to fully protect the interests of smaller and medium-sized investors. Preventing bank credit from being used to buy shares was vital to protect the stability of the banking system "and thus ensuring that the real economy is not struck by stock market turbulence", he added.
The China Securities Journal also published a front-page commentary by one of its reporters, saying liquidity could tighten in the short term due to higher interest rates, the issuance of special bonds and the central bank's open market operations. In the longer term, however, it would be hard for China to keep raising rates if, as expected, the Federal Reserve starts cutting US borrowing costs.
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