Affirmative Action

The Chinese corporate regulator has taken an unprecedented step to reduce volatility in mainland share markets by restricting large scale stock sales within 30 days of annual or semi-annual statements being issued to the market.

Just like many things made in China, the Chinese stock market is like many of the country’s exported fast moving consumer goods – it works but has the potential to breakdown at any point in time.

The Shanghai Composite Index has lost almost half of its value since hitting an all-time high in October having plunged 49.5%.

The Government has been blaming much of this on previously untraded shares flooding the market, but access to information ahead of the market being made aware is also accepted as being partly to blame.

In a bid to shore up the losses and restore investor confidence in the stock market, the Chinese security regulator announced the new measures on Sunday.

The regulator stated that the new rule was aimed to ease pressure and the impact of stock price movements in the bid trading system brought about by shareholders transacting large quantities of shares.

When more than 1 per cent of a listed firm’s total shares are sold within a month by an individual or single entity, the holders now have to use what is known as the block trading system.

There is no doubt the new measure will ease volatility in the stock market over the long run.

However, its short term impact is hard to measure.

The market opened nearly 7% higher on Monday before declining during intra trading day.

Shanghai Composite Index closed only 0.72% higher than the previous close, and the smaller Shenzhen Composite Index lost 0.92% from the previous session – a sign investors are questioning the short term effectiveness of the new regulation.

In order to prevent the market from falling below the psychological 3000 point mark, some argue that the government has to introduce new rules that would have stronger and more effective short term impacts, such as reducing the stamp duty.

Both Shanghai and Shenzhen Composite Index plunged 6% in a day last year when the stamp duty was increased to 0.3% from 0.1%.

Under the current regulatory system, the China Securities Regulatory Commission alone can’t make a move on the stamp duty.

Such decision concerns and must be approved by the Ministry of Finance, and there is no sign such change will be introduced in the near future.