May 18, 2017 / 8:17 AM / 6 months ago

China's confused market strategy reveals old flaws

WASHINGTON (Reuters Breakingviews) - Confusing days are here again for Chinese investors. Tough talk from top regulators about financial risks accelerated the selloff in the country’s financial markets earlier in the year. But now officials are trying to prop up stocks to provide a happy backdrop for political showpieces. It’s a muddle that even China’s proposed super-regulator cannot resolve.

Guo Shuqing, China's newly appointed banking regulator, attends a news conference ahead of China's parliament in Beijing, March 2, 2017. REUTERS/Shu Zhang

Investors are used to mixed signals. Back in 2015 a stock market crash which wiped $5 trillion off the paper value of listed equities led to a clunky intervention. The garbled response from rival securities and banking watchdogs prompted Chinese officials to explore setting up a super-agency to oversee all the regulators.

Graphic: Under pressure: reut.rs/2pY9RY0

Now the People’s Republic is facing fresh financial instability. The first-quarter economic revival has lost some traction, renewing fears about corporate debt which has reached around 170 percent of GDP. Regulators have weighed in. In February the normally soft-spoken Liu Shiyu, chairman of the China Securities Regulatory Commission, attacked financiers he called “giant crocodiles”. The next month Guo Shuqing, the newly appointed head of the bank watchdog, said he would tackle “chaos” in the banking system and promised to resign if he failed. More quietly, the central bank drained some of the short-term liquidity that has helped to fuel risky bets.

These signals helped knock 6 percent off China’s benchmark CSI300 equity index between mid-April and mid-May. Sovereign benchmark yields touched their highest level since 2015. Money rates rose, and commodity prices continued sliding.

But Beijing now seems to be worried the correction may take the gloss off political events. Some brokers were told not to process “sell” orders during the “Belt and Road” summit in Beijing, which finished on Monday. Bureaucrats preparing for the 20th anniversary of Hong Kong’s reunification on July 1 are apparently eager to ensure the territory’s stock market rises. They are also trying to engineer a rally on the mainland in time for the Communist Party’s flagship congress later this year. That helps explain why the central bank is cranking up liquidity, putting a combined 330 billion yuan ($47.98 billion) into money markets on Monday and Tuesday.

Authorities may think they can tackle financial excess and order up a rally at the same time. But their efforts to manipulate markets sabotage any hope of introducing a coherent policy. That is a contradiction that no amount of fiddling with the regulatory structure can fix.

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