"The stock market is a huge gambling house," remarked famous Chinese economist Wu Jinglian earlier this year. His statement immediately triggered an unprecedented fierce debate. Along with the strengthened management of and supervision by China's regulatory authorities, the debate trailed away. Since July this year, however, stock prices have plummeted, which have provoked another debate.

In the second half of this year, the media successively exposed cases involving illegal operations on the stock market. Even though the China Securities Regulatory Commission (CSRC) punished the offenders, investors' confidence was sapped. In addition, the measures for reduction of State shares and the September 11 terrorist attacks on the United States also caused negative impact on the stock market. As a result, the stock index plummeted from 2,245 points to below 1,600 points within several months. Investors began to worry about the future of the stock market.

On October 22, the stock market fell abruptly, closing at 1,514. That evening, CSRC announced a suspension of the State share reduction program, which led to an immediate rebound of indices on the Shanghai and Shenzhen stock exchanges. The suspension also led the debate on stock markets into a new stage.

Xu Xiaonian, a famous Chinese economist, regarded CSRC's decision an unwise action, saying that it means the government shouldered the entire responsibility for the fall of the stock market. He believes that the slump in stock prices is a revolutionary adjustment of the stock market. His statement, centering on demolishing the existing stock market and establishing a new one, has invited severe criticism. Wu Xiaoqiu and other economists spoke highly in the State share reduction, saying it showed the government's practical and realistic working style. The debate between the two sides focused on how to evaluate and develop China's stock market, and how to reform the stock market, step by step or at a fast pace.

Replace the Old Structure with a New One

Xu Xiaonian (economist and Director of the Research Department of China International Capital Corp. Ltd.): The suspension of the State share reduction measure is unwise because, in this case, the government shouldered the whole responsibility. As a matter of fact, the abrupt fall of the stock market was not caused by the reduction of State share, but by illegal operations of brokers, stock traders and listed companies. Apart from these, artificially high stock prices, a lack of basic support and the demerits of the stock market's structure also led to a sluggish stock market.

However, CSRC's decision merely declared that the government does have a bottom line of stock index. This made investors doubt the pledge of the governmentnot making the stock index the target of regulation. They worried that the stock market would resume the vicious circle of "stock index slumpgovernment supportstock index rebound", and thus bubbles form and then burst.

The government's interference in the stock market broke investors' normal expectations and added risks to the market. Despite this, the recessive insurance of regulatory authorities also broke the balance between risks and benefits, resulting in a twisted signal of price and unreasonable resources allocation.

Some scholars say that the continuing sluggish stock market may greatly affect the financial market. To gain government support, some people exaggerated the possibility of a break in the capital chain and a financial crisis to be triggered by securities dealers' run on the stock market. But if the capital belongs to banks and law-violating enterprises, or if it is trust money that guarantees repayment, the early break of such a capital chain is good. Problems of the securities sector may cause a 3-percentage point increase in the rate of bad accounts. If they remain unsolved, there will be more bad accounts. In addition, the fact that just a 30 percent decrease of stock index can trigger the break of the capital chain revealed serious problems in risk management of our stock institutions. Given this, it is unreasonable to let the government take responsibility for a capital chain break.

According to economics and financial knowledge, runs on the stock market are less likely to happen when compared with runs on banks. Even if it happens, its effect is less than that of banks because of their different structures. The reason is that when the bank grants a loan, it is enlarging its credit. But investors are not involved in creating their credit; they have nothing to do with the issue of credit.

Most China's bank assets belong to State banks. Runs on banks may trigger a crisis of the State credit. But runs on the stock market do not affect the State, let alone the State credit. Hence, the solution to difficulties in operation encountered by securities dealers should not be the raising of stock prices.

A Careless Statement

Xiao Zhuoji (economist): The suggestion of replacing the existing stock market structure with a new one can be traced back several years. It stemmed from the argument that the demerit of China's stock market has surpassed its merit, and that China's stock market is a large gambling house. I do not agree with these views. China's stock market has played a positive role in the country's economic development and scored a notable achievement. For years, China's stock market has developed in full swing, and contributed to raising funds, transforming economic structure, optimizing resource allocation, enhancing economic returns, increasing tax revenue and integrating Chinese economy with that of the world. It is worth noting that funds raised from domestic and overseas capital markets have reached 1 trillion yuan, and revenue from the stamp tax on buying and selling stocks has possibly risen to 140 billion yuan from 120 billion yuan at the end of last year. Both have greatly supported the country's economic construction.

The destruction of the present stock market means the 1 trillion yuan raised by 1,200 firms from the stock market cannot be returned to investors, and will cause a loss of about 3 trillion yuan to some 65 million investors, because some of the capital has been used for the construction of expressways, airports and enterprises. If these projects are suspended, who will take the responsibility?

In addition, who can guarantee that the new structure is better than the old? Therefore, we should take a prudent attitude to such an important issue.

The problem of China's stock market does not lie in a shortage of capital, but the lack of confidence. Economist Dong Fureng proposed that we should protect China's capital market as if we are taking care of a child. A child will stumble when learning to walk; it is an inevitable course of growing up. Similarly, it takes time for China's stock market to mature. It is not a responsible attitude to destroy the present stock market and establish a new one.

Dong Fureng (economist): It is not practical to smash the present stock market system and set up a new one. Such a suggestion is very harmful to the stock market. First of all, most investors will lose confidence in the stock market, and worry about its collapse. As a matter of fact, in the past 10 years China's stock market has witnessed a tremendous achievement, in spite of problems. We should improve the stock market and make it more standard, instead of smashing it. Investors' confidence in a stock market is indispensable. Without it, the stock market will be in trouble. It is difficult to reestablish investors' confidence. This is why I say Xu's statement is not prudent.

Zhao Dajian (President of China Securities Co. Ltd.): The debate has actually entered on the relationship between the stock market's standardization and development. For the former purpose, some suggested demolition of the present stock market structure, but it is not practical. Like many other things in China, the stock market should be standardized in the course of development. Otherwise, it will fall into plight.

Ji Hong (Professor at Capital University of Economics and Business): In the past few years, cases involving malpractice have occurred one after another on China's stock market and the quality of listed companies is dwindling. But it is the investors' choice to keep the stock market or not, rather than the assertion of a single expert. Negating the stock market is equated with negating the government's ability in management. The stock market is an important component of modern market economy, and the most sensitive and influential part of macro-economy. Hence, the government should not turn a blind eye to the fluctuations of the market.

With the development of China's stock market, opportunities for people to make a huge profit overnight are rare. Those who have made a fortune by taking advantage of a fledging stock market found it hard to gain the same opportunity. Demolishing the present stock market and establishing a new one will make it possible for them to reshuffle money, and gain the opportunity to make a fortune. But the stock market was set up and has been managed by the government. To overthrow it is no more than a daydream. Generally speaking, a stock market exerts influence on a substantial economy in one or two years. Therefore, if we now neglect the stock market, it will retaliate with a heavy blow to the macro-economy.

(Beijing Review No.51)