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Stock Market Fluctuations and Intervention: Review and Analysis

(2015-07-18 10:58:06)
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Dow Jones Newswires19 May 2015 4:30 PM

Hong Kong Stocks Close a Tad Higher After Morning Losses -- Market Talk

0830 GMT [Dow Jones] Hong Kong stocks ended higher Tuesday after dipping in the morning. The Hang Seng Index rose 0.37% to 27693.54, with blue chips Bank of Communications (3328.HK) and China Life Insurance (2628.HK) both up more than 2%. The Hang Seng China Enterprises Index gained 1.9%, and the Shanghai Composite Index rose 3.1% to 4417.55. Investors have raised concerns about China's margin lending, as the margin loans-to-market cap ratio is more than 3% compared with roughly 2% in the U.S. "We don't see any clear indication from the Chinese government yet that they will crack down on margin lending," says Jiang Guohua, an accounting professor at Peking University who researches financial accounting and is based in Beijing. "But there's a high probability that the government will do something to crack down on margin lending, which has encouraged investors to gamble in stock trading."(Dominique.fong@wsj.com; Twitter: @dominiquefong)

 

Stock Market Fluctuations and Intervention: Review and Analysis

To be relieased:

by Dr. JIANG Guohua, Professor of Accounting at Peking University, Guanghua School of Management

July 15, 2015 (BEIJING) - The recent Chinese stock market fluctuation is stunning but I am bullish on China's economic future and bullish on the future of stock investing in China. I do not believe economic fundamentals will be hurt by a fast dropping stock market and therefore think that it is important to let problems be worked out by the market, rather than through the intervention of the government.

I contribute the rise of stock prices over the last 12 months, before the dramatic collapse, to two causes.  First, investors saw a turning point after more than five years of declining economic growth and thus boosted their expectation of future economic growth quantity and quality. Second, the opening up of margin trading amplified the optimistic economic outlook.

It is important to realize that more dramatic stock market fluctuations are not unseen worldwide -this is a part of the market mechanism. As long as the economic fundamentals are not experiencing dramatic changes, we better let the stock market adjust itself.

As such, it is my view that the government intervention is an overreaction. Worrying about the collapse of equity prices, the regulators basically took price-setting into their own hands and what we could gain from this intervention may be overshadowed by the magnitude of its consequences. In fact, investors, both domestic and international, will wonder about the long value of stock price and if it still a reflection of the value of the stock, as it should be in a market. Therefore, the intervention encourages speculation.

 

 

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