The recent rise in stock prices is recoverable growth; market-oriented economic adjustments needed.
From a sustained downturn to stable and healthy development, China's capital market has reached a major turning point. Chinese people should cherish this hard-won situation and seize the opportunity to maintain the development of the stock market, said Zhou Zhengqing, a member of the NPC Standing Committee, vice chairman of the Financial and Economic Committee and former chairman of the China Securities Regulatory Commission, in a recent interview with the media. According to Zhou, there is no serious bubble in China's stock market.
Five factors brought the market to a major turning point
Since June 2001, China's capital market has been stagnant. This is not normal. According to Zhou, there are multiple reasons for this. One is a misunderstanding of the development of capital markets. Faulty thinking is common in society. People tend to fundamentally reject China's capital market and have been advocating "a new start". This type of thinking has had a negative impact on the capital market.
"The major shifts and changes that occurred in 2006 are the result of efforts to improve and expand reforms. This has not been easy; we must cherish the situation we now have," said Zhou Zhengqing. "There were five main factors that contributed to last year's turning point."
Firstly, the CPC Central Committee and the State Council have attached great importance to the development of the capital market and made important strategic plans and brilliant policy decisions.
Secondly, the improved legal environment is conducive to the development of the capital market.
Thirdly, by completing equity division reforms, China solved some of its major lingering problems, which will have a long-term impact on the healthy development of China's capital market. Moreover, shareholders can no longer hold both tradable and non-tradable shares or share the same equity property, strengthening the basic mechanism.
Fourthly, the sustained, rapid and healthy development of the national economy created a favorable external environment for the capital market. "The money market in particular was more liquid, which helped ease the shortage of funds in the capital market that has been a problem for the last two years. Meanwhile, investor's growing demands have raised the objective requirements for the development of the capital market," said Zhou.
Improving the regulation and supervision of the capital market as well as the quality and efficiency of listed companies are also important factors in the recovery of the stock market.
Slowing down excessive growth by introducing administrative changes is not advisable
On February 27 this year, a record was set on the Shanghai and Shenzhen Stock Index when the largest single-day decline in the market occurred, triggering a nationwide debate. Some people argued that there was a serious bubble in the capital market. In response to these claims, Zhou Zhengqing said: "This is a faulty conclusion based on a biased analysis of the stock market." In his opinion, the slump on February 27 was simply an internal market rebound.
Zhou pointed out that as virtual capital, stock prices often fluctuate. It is also normal for certain bubbles to occur in the capital market. As long as the bubbles are small and don't pose a threat to the healthy development of the market, there is no problem. The February 27 slump was an inevitable rebound. However, anxiety somehow fuelled rumors that "serious bubbles exist in China's stock market", which further aggravated the fall.
Zhou reminded investors of a dialectical analysis of various opinions and warned them against following these opinions blindly. Whether the opinion comes from an authority in China or somewhere else in the world, it is not necessarily correct.
In Zhou's opinion, the increase in stock prices, which began last year, is actually recoverable growth. At the end of 2006, the Shanghai Stock Index reached 2,600 points. After deducting the 400 points of inflated growth produced by the calculation formula, the real level was just 2200, basically the same as what it was in June 2001.
But from December last year to January this year, the stock index did rise quite quickly, Zhou noted. "This situation cannot be ignored. However, we must use economic mechanisms and market-oriented adjustments to address the problem rather than suppress it by implementing administrative regulations".
"Generally speaking, the development of the stock market is healthy," said Zhou. A sluggish capital market would, in the long-run, be a huge risk to the entire economy and financial system. The turning point reversed the slump and quickened the pace of capital market development. This is a good thing. Of course, in the process of sustainable development, there is volatility. This is determined by market mechanisms. China must try to understand this phenomenon and prepare for it.
Campaign-style supervision and control not feasible
In his government work report, Premier Wen Jiabao said that China needs to promote the development of a multi-layer capital market system, expand the size and proportion of direct financing, steadily develop the stock market, speed up the development of the bond market, and steadily develop the futures markets. Moreover, the country should also improve and strengthen market infrastructure, promote the market-oriented reform of the stock and bond issuing system, improve the quality of listed companies, and increase market supervision.
Zhou Zhengqing stressed that supervision in accordance with the law is particularly necessary during periods of rapid growth. However, campaign-style supervision and control is not feasible. Fraud, insider trading and black-market banking are crimes that must be severely punished.
"Compared with mature markets, China's securities market is still in its infancy. The quality of investors is not high enough. The regulatory system is not mature enough. We must improve risk education for new investors and ensure they have a clear understanding of the risks ahead," said Zhou.
Zhou says that China needs to spend more time developing a multi-level market system and, in particular, it should endeavor to increase the proportion of direct financing and accelerate the development of the bond market. The entire process of bond issuance should be open, transparent and market-oriented.
Finally, Zhou said that by working together, implementing the correct central policies and governing the market according to law, China will be able to maintain the sustained, stable and healthy development of its capital market during the 11th Five-Year Plan period.
By People's Daily Online