China is fighting for better regulations - May 22, 2016

China is fighting for better regulations

This year started rather alarmingly for the Chinese stock market: the indices fell more than 20% in weeks and the government was unable to regulate the market, even with serious steps. Now they reportedly asked for British help in creating a proper regulatory system.

At the moment, it seems that the Shanghai Composite Index’s fall stopped: since February there were no big flops and there is a moderate increase in the prices. Nonetheless, in January and February the index suffered a 30% fall and the government struggled to stop it. What’s worse, this huge market correction happened after a 150% skyrocketing in the previous 12 months. This not only showed the system errors, but led many analysts to believe that this might end in a new global financial crisis.

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Source: Bloomberg
This huge correction also showed that the Chinese stock market is fragile. One of the reasons for this is that there are lots of individual investors on the market, and they usually sell their stocks when there’s a chance of loss. This might easly lead to a panic on the market, that is what happened at the beginning of the year too. This is not a great idea, and patience usually pays off better.

The other serious problem is that the market regulations are weak. Therefore, the government tries to find better solutions, so that situations like this could be avoided. Several sources told Reuters that China is even looking for outside help to do this: “China has asked Britain for advice on plans to create a financial super-regulator, as it looks to improve financial oversight following last year's stock market crash”. Their aim could be “to increase transparency, reduce systemic risk, and stop companies exploiting loopholes.”

Reuters evokes that Britain’s regulatory system changed after the 2008-09 financial crisis and that they handed “enormous power to the Bank of England, which is responsible for averting risks to the financial system as a whole”. Sources told the news agency that the “UK model is a reference, but we [China] can’t completely copy it” since Chinese political system is too different.

According to the sources, one solution might be to merge China’s top financial regulators and create a “super-regulator” like the one in Britain. As for now, there is no decision (or at least no official decision) from the government, so we have to wait and see the solution. At least we can be sure that there is a will to regulate stock market better in China and that is good news for the global markets.

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