Walter Hutchens’ Blog

David Barboza reports in the New York Times that China ” is considering creating a $15 billion fund to help bail out the nation’s ailing stock market[.]” The article doesn’t provide many details about the potential bail-out (including, importantly, how and to whom this “bail-out” money would be distributed), but it has a good overview of the recent downward spiral of PRC stock markets and catalogs government efforts to curb it. It notes last week’s dramatic up tick was probably related to rumors of this potential bail-out.

Will such a bail out happen? I am skeptical. But if it does, will it fundamentally heal the markets? As a single measure, surely it will not. As Barboza notes, $15 billion would be about 10% of the market cap of China’s listed shares. It will take a lot more to replace the value that’s fled the market in the last few years. (This bail-out notion may help more as a rumor than as an enacted policy).

More importantly, the markets are not a disaster because they lack capital. They are a disaster because of fundamental, structural problems. The government picks who gets to list, and investors lack meaningful ways to discipline management or overcome the informational asymmetries between them and those inside the government and its listed firms. Gradually, investors have “bailed out” of this current approach. A capital transfer could help some investors, but fixing the markets will require transferring substantial power out of the hands of government and into the hands, probably, of independent courts and, certainly, of market participants. The PRC regime has been reluctant to let go of that kind of power. So, if they allowed short selling, I’d still be selling China’s markets short, government largess notwithstanding.