context: A bearish stock market increases equity-pledged loan default risks. When price reaches the risk-tolerance redline, investors have to sell equity collateral to avoid more losses, creating a vicious spiral that leads to further stock price decline. Financial policymakers have been mobilising resources to save the market. Long-term consequences of these emergency responses, however, remain uncertain.
The current capital market arrangement is pretty depressing, says Li Yang 李扬 Chinese Academy of Social Science researcher. He argues China’s capital market is still tangential to the national economy, with several outstanding issues
- capital market has a low correlation to economic fundamentals
- capital market does not provide risk management mechanism; it becomes a source of risk
- participants focus more on fundraising and less on value investments
- the original intent of building capital markets was to improve corporate governance through corporatisation, but many listed companies’ governance structures are chaotic and worse than non-listed firms
- developing capital markets should improve investment structures and raise direct financing ratio, but they don’t contribute much to de-leveraging
Capital markets are associated with too many political functions, adds Li. Achieving political goals should not be incumbent on capital markets, as they are not all-powerful. The only thing that capital markets can do is improve resource allocation efficiency, and making them a political tool will distort this function. But now capital markets have even become a vehicle for poverty alleviation.
Using political logic to develop capital markets could easily fall into the trap where regulators over-emphasise stock price, financing volume, transaction, and total market volume. These indicators are implicitly or explicitly treated as convenient indicators for market performance, overlooking micro-level issues, says Li.
Capital markets become a casino for speculative money, as they cannot reflect either economic fundamentals or company operations—capital markets should be a financing channel in themselves, but now they require external support to sustain operation, adds Li.