Is excessive regulation hurting Chinese stock market credibility?

The global economy is going through a jittery state. After a long ordeal with Greece ending in a disappointing mode for Euro leadership, now the mighty Chinese market seems to be heading towards meltdown. Stock markets across the globe are going through a massive slump. While Greece issue was because of a political decision and a failed effort to unite diversified societies into one single currency regulation. The future of Euro was always questionable because of its inability to have an authoritative say in its participating countries administrative structure.

Now the overly controlled Chinese market is going through a problem of its own. The Shanghai Composite Index slid 5.9 percent to 3,507.19 at the close. With at least 1,331 companies halted on mainland exchanges and another 747 falling by the 10 percent daily limit, sellers were locked out of 72 percent of the Chinese market.

The Chinese authorities have jumped in with their support measures. The China Financial Futures Exchange raised margin requirements for shorting contracts on the small-cap CSI 500 Index. China Securities Finance Corp. said it will buy more shares of small- and mid-cap companies, while people familiar with the matter said the government agency is seeking at least 500 billion Yuan in liquidity to support equities. The government also ordered state-owned firms not to cut holdings in their listed companies.

43% of the Chinese stock market froze due to the trading halt. On the Shanghai exchange, 365 companies suspended trading, equivalent to 33 percent of all listings. A further 992 were halted in Shenzhen, or 56 percent of the total. Blocking the trade to stop stocks from falling is not the best way to deal with the situation. Investors are stuck in a very fearful situation; they will try to liquidate their investments by selling decent stocks. Such government intervention is likely to backfire as retail investors will definitely act frantically. The Chinese investor sentiment was developed in such manner that a market correction seemed to be unlikely and the government is trying to stop the fall in a very unnatural manner. In the long term investors might not be interested to invest into the stock market having burnt their hands once. I personally believe, this is hurting the credibility of the stock market.

Though the government is equipped enough to tackle this scenario at the moment, it is important to help the market act on its own. A ripple effect cannot be dominated by a government strategy. You cannot expect all your investors to be value driven all the time.

Anwesh Chakraborty