3月1日，The Austrilian刊登上海交通大学上海高级金融学院副院长、金融学教授朱宁英文版新著China’s Guaranteed Bubble的书评，评论指出，朱宁教授的新著从政府隐性担保的角度，阐释了监管层为何出台了一系列救市措施却依旧无法提振低迷的中国股市。
 

Chinese government can’t control falling markets

The Chinese government’s abortive effort to prop up its freefalling stockmarket last year will go down as one of the worst policy failures in financial history.

The crash and failed intervention has encouraged growing global pessimism about the broader Chinese economy. Having spent trillions of taxpayers’ money on buying a hodgepodge of shares, the stockmarket is still mired in depression, with investors too shellshocked to return.

What prompted policymakers to pour in trillions to prop up the bourse? Some people have argued that the incompetency of regulators and financial technocrats was a driving force.

It is fair to say that some regulators are inexperienced. But are they so incompetent as to make such an elementary mistake? It wasn’t until I read Professor Zhu Ning’s book China’s Guaranteed Bubble that I was able to make sense of Beijing’s decision.

The book comes highly recommended by Professor Zhu’s supervisor at Yale, Robert Schiller, a Nobel laureate in economicsand one of the world’s leading authorities on behavioural economics and housing bubbles.

What do Chinese investors do when the stockmarket crashes? They cry and curse, but they’re also likely to stage protests at the gates of the Chinese securities regulator. Pause for a moment and think about that. Can you imagine Australian investors camped outside ASIC if the local market crashed?

But the Chinese regulator has one important function that is different from its western counterparts: to promote the development of the country’s capital markets.

Stateowned banks have dominated China’s financial system and Beijing is keen to develop a more diverse and multilayered capital market. Developing a wellfunctioning equity market is a key part of that plan. This means the government has to inspire confidence in investors in order to persuade them to pour money into the market.

This goal has been translated into an assumption among Chinese investors, mostly retail investors, that the government will not tolerate wide fluctuations in the market. They believe that the government will not tolerate a crash.

Zhu argues that investors believe the regulator’s mandate to maintain stability means that it will only allow the sharemarket to go up. Whenever the market goes down, people blame the government and especially the regulator.

Why do Chinese investors hold such unrealistic assumptions? This might seem improbable to us, but there is an impeccable logic behind it. It’s because the Chinese government is willing to use its vast resources and good credit rating to offer a range of implicit guarantees to everyone from the institutions engaged in shadow banking to inefficient stateowned enterprises. To put it simply: Chinese communists don’t really do moral hazard.

During the GFC, the US government taught us a painful lesson about the dangers of having institutions that were “too big to fail”. The Chinese government has taken this perverse logic to the next level: no one is allowed to fail.

For example, when a trust product (another name for a highyield corporate bond) is about to fail investors remain calm because they know the local government will step in.

Why? It’s because they don’t want the borrower to go bust. Local governments are also likely to act when investors take their grievances to the street or rally in front of government buildings. An important element of a government official’s KPI in China is their ability to “maintain stability”.

This is why there are no widespread bankruptcies and defaults despite the rapidly deteriorating economic situation. Local government and stateowned banks are keeping a lot of zombie firms alive.

There is a similar situation in the property sector. Chinese homeowners are likely to protest outside a developer’s office if it offers more discounts to new buyers or if prices drop. Some buyers even smash up the display centre and take sales staff hostage.

Instead of sending in the cops, local governments often act as meditator, asking property developers to compensate aggrieved buyers. Once again, social stability trumps all. The real danger of these actions is that it encourages the assumption that the government will step in when things go wrong.

This approach does not allow Chinese investors and real estate buyers to appreciate the importance of risk. That is why people speculated on the market heavily before it crashed. They believed it was a governmentled bull market.

So, the failed intervention occurred because of Beijing’s implicit guarantee to back the equity market rally, which it helped fuel. This implicit guarantee blurs the lines of responsibility as well as people’s attitude towards risk.

Zhu argues that unless Beijing reins in these implicit guarantees, a financial crisis is inevitable.

It reminds me of the false sense of security created by the AAA ratings handed out willynilly to mortgagebacked securities and collateralised debt obligations ahead of the GFC.