China’s stock market brushed off a central bank warning about the danger of an asset bubble on Tuesday and rose to another record high in a sign of the government’s waning ability to control share prices.
At least three state-run newspapers ran prominent stories about the warning from Zhou Xiaochuan, governor of the People’s Bank of China, in Basle on Sunday. When Mr Zhou was asked if he was worried about a bubble forming in the stock market, he said he was.
But his comments, the latest in a series of official public statements expressing alarm about the level of the market, were ignored by investors, who bid up the index by nearly 3 per cent.
Authoritative statements from senior officials about the stock market have for many years set share prices in China, where investors have taken the government’s word as gospel.
Such statements were traditionally delivered through the People’s Daily, the mouthpiece of the communist party, usually in articles signed by an unnamed “special correspondent”.
In the current bull market, however, with new stock trading accounts being opened at the rate of more than 1m a week, the admonitions of senior officials suddenly seem impotent.
“No one believes [Mr Zhou] can do anything to affect the market,” said Fraser Howie, the author of a book on Chinese stocks. “There are a lot of gamblers with a whole pile of money who are prepared to continue punting.”
The Shanghai composite index rose by 130 per cent last year, and is up by just 50 per cent so far in 2007.
One of the main drivers of the market remains China’s low interest rates, which offer the country’s thrifty savers a return of just 2 per cent – offering a negative real return compared with inflation of more than 3 per cent.
“If Zhou Xiaochuan really wanted to affect the market he could double the [government-controlled] bank deposit rate, but that would wipe out the state-owned banks,” Mr Howie said.
In December, 1996, the People’s Daily ran a front-page editorial entitled “On correctly understanding the current stock market,” which warned against excessive speculation.
The market fell that day by 9.91 per cent, and by a further 9.44 per cent in the following trading session as investors dutifully interpreted the editorial as the government's official stance.
By contrast, when the “special correspondent” declared in the same paper in June 1999 that a run-up in stock prices was “healthy”, the market soared.
As recently as this January, share prices fell sharply after comments about the market by Cheng Siwei, a senior member of the National People’s Congress.
The authorities do have other ways of influencing share prices. Most importantly, all issues of equity must be approved by the securities regulator, which theoretically allows it to increase the share supply and dampen price rises. The government could also use fiscal measures to calm demand.