China financial guru urges investors to stay calm
and government to severely punish manipulators

By Yi Xianrong 
China People Daily

Yi Xianrong, is the director of the Institute of Financial Development and System under the Chinese Academy of Social Sciences.

It was a black Tuesday for China's stock market on February 27. Both the Shanghai and Shenzhen stock markets plummeted by 9%, which immediately led to a general decline in global stock prices.

The price of capital goods on the stock market is closely tied to the market's expectations. The mentality of simply following the majority has made later investors repeat the actions of others. If their expectations are optimistic enough, the market will boom; on the contrary, if investors are pessimistic or tentative, the market will slow. As a result, fluctuations in the stock market are common. When the market booms, investors are quick to forget the painful lessons of the past; when the market collapses, their fears rapidly grow.

China's domestic stock market grew by 130% in 2006. If one compares this to the real economic situation, such increases are unimaginable. But in the investment market, everyone feels this is normal. As long as investors are optimistic about the prospects of the market, the prices of A shares will rise. But every stock market eventually drops. Why were we so excited by rapid growth and then shocked by the 9% decline? Nobody was astonished by the rapid growth, but obviously investors were not prepared for the slump. Moreover, a decrease of 9% is by no means comparable to the 130% by which the market has grown. If investors consider the stock price changes calmly, they will not be surprised by either a rise or a fall.

For the same reason, the government should not see stock price fluctuations as a direct result of its policies, nor introduce sudden changes. Any policy should be a long-term plan. The government should make medium and long-term plans and endeavor to make the policy more open and transparent. Thus, any policy that is introduced will be in line with market expectations and not cause market price fluctuations.

Of course, serious stock price volatility is undesirable for the healthy development of the market. The government should probe into the reasons for the fluctuations and find out what they can do to regulate the market. For example, regulatory bodies should consider whether there are any people or organizations manipulating the market, whether anyone is deliberately creating chaos, and whether the current rules need to be improved. Only in this way can the market become healthier.

It has been stressed that the securities market is an information-oriented market, as well as a market with serious information asymmetry. Therefore, ordinary investors, especially smaller investors, are easily hurt. The government should adopt rules to better protect the interests of these individuals and groups and severely punish those who see to take advantage of them. In addition, the government should do everything possible to educate investors and help them to realize and prepare for the risks involved.
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