Who is REALLY inflating the "Chinese Stockmarket Bubble"?
comes an article from the Financial Times that sheds a little more light on the subject.
Warning on illegal Shanghai share deals
State-owned companies and government agencies in Shanghai, including those responsible for education and pensions, misappropriated Rmb6.3bn for illegal investment in the stock market over the past three years, according to a senior judge at the city’s highest court.
Qi Qi, deputy director of the Shanghai High People’s Court, said the diversion of funds into equities was the result of weak controls over public spending and could undermine confidence in the stock market.
“This is becoming a major threat to the stability of the market and to investment funds,” he said. “Moreover, the volatility of stocks can cause huge losses for public finances.”
His outspoken comments are the most authoritative confirmation yet that the spectacular boom in the mainland stock market over the past two years is not just the result of funds coming from millions of new individual investors, but also reflects large speculative investments by different branches of the government.
Chinese share prices are up 60 per cent this year, on top of 130 per cent in 2006.
Fraser Howie, co-author of a book on the Chinese stock market, believes undisclosed public investment in equities could be as high as $125bn (€93bn, £63bn) although he says it is impossible to prove the figures.
Economists fear that a substantial stock market fall could lead to calls on the authorities to bail out different government units.
“There has not been any effective mechanism in the country to supervise the operation and management of public funds, and as a matter of fact it is difficult to curb their malpractices,” Mr Qi said. The judge said the figures were based on an analysis of 105 embezzlement cases accepted by Shanghai’s courts between 2003 and 2006. About Rmb4.1bn ($539m, €402m, £271m) of the illegally invested funds had come from 69 different state-owned companies.
The other government units involved included agencies responsible for social security, education, housing maintenance and public utilities. Most are allowed to put some funds into government bonds, but not equities.
Mr Qi’s comments were initially made to a number of Chinese newspapers at a briefing on Tuesday. The court yesterday confirmed his comments and said they were a warning to investors about the potential risks in the market. The Shanghai government did not respond to requests for comment.
The revelations by the court follow a corruption scandal in Shanghai last year where officials were accused of siphoning off part of the city’s pension fund.
Earlier this week the banking regulator said it would fine eight banks for lending Rmb5.1bn to two Chinese state-owned companies, which had illegally used most of the funds to invest in equities. The announcement was seen as a warning to other companies.
Copyright The Financial Times Limited 2007
The problems that a share price collapse could have on other Chinese institutions could have serious knock on effects for political economy.
If, as assumed, the Chinese government will simply step in a bail out these government departments the incentive mechanisms are all wrong. The upside is huge and the downside is limited. The government needs to take action to curb this behaviour even if the result is a fall in share prices in the short term.