Annals of Useless Regulation
New York - Last week brought a setback
for the development of efficient capital markets in China. The China
Securities Regulatory Commission "suggested" to domestic fund managers
that they avoid making any negative public statements about Chinese
stocks. According to the South China Post, the securities regulator
also required four financial newspapers to publish upbeat reports about
the market.
We do not expect that this will do anything significant to prevent
further volatility and losses in the stock market. Negative information
will continue to flow through the internet and word of mouth, at least
for those who are well connected. Institutional investors, both in
China and abroad, will continue to be able to employ internal and
external research analysts; it does not seem to have occurred to the
Chinese authorities that there are thousands of analysts, consultants,
market researchers, and economists who will continue to supply
relatively high quality information to institutional investors. For
those who can afford to pay for good research and information, the
regulation is meaningless.
However, by preventing domestic fund managers and newspapers from
issuing negative commentary to the public, the CSRC has ensured that
small investors in China will receive even less useful information than
they have now. In short, rather than preventing any slide in stocks,
this measure gives institutional and foreign investors even more of an
advantage over the domestic retail crowd. More than preventing
"instability", we expect this legislation will only exacerbate the
eventual pain felt by small investors.
In the past, Western observers may have been able to feel some
smugness when developing countries adopted illiberal and inefficient
regulations. However, given the recent decision by Western regulators
to focus on rumor-mongering and naked shorting,
as opposed to the fundamental problems that caused banks to be so
vulnerable to rumors and short-sellers, we are hardly in a position to
criticize the Chinese ban on negative commentary. The dislike of
skeptics truly transcends all cultural boundaries.
Posted at 03:38 pm by Ronit Bhattacharyya
