From the Economic Observer, issue no. 362, April 7 2008
Cover editorial
Original article: [Chinese]

As the Chinese stock market has slumped in the past few weeks, debate over whether the government should save the market has intensified. While both sides remain stubborn and contentious, government watchdogs have remained at an arm's length. In our view, the key question is not whether or not the government should save the market, but instead, what role the government should play in general.

We believe it's necessary to search for solutions with a broader point of view. There are many macroeconomic issues that need attending to today, such as maintaining China's rapid economic growth, holding back inflation, adjusting its economic structure, and shaping industry upgrades, which are all tied to the stock market in some way. With so much on the table, it's not possible to work out all problems at once. Instead, problems, and their remedies, should be prioritized.

The recently published "2008 Work Focus of the State Council" listed preventing economic overheating and limiting inflation as the first priorities. It is safe to say that for policymakers, these will now supercede "the two preventions" of overheating and an economic slowdown.

At the macro-level, protecting the stable growth of the Chinese economy is the most effective way to save the market. Over the past several years, the stock market's function as an economic barometer has undergone a process of normalization. This is reflected by the sensitivity of the stock market to China's macro-economic fluctuations over the same period.

Recent months have shown that businesses' sentiment towards the market was changing delicately, and with external markets still in cold, it was necessary for regulators to assess the risk of a slowdown—and thus make it part of their work focus. The stability of economic fundamentals was the root for the Chinese stock market boom in a long-term, without which any no policy could push the stock market to a new stage of growth.

China has yet to free itself of administrative-control policies, and thus many still look to it as the great intervener in the market. This is precisely why the market is where it is today, and what has led the government into its currently awkward position.

According to market economy principles, the market will rise and subside, and the government should not intervene in without solid reasoning. As a result, the government shouldn't have adopted administrative measures to curb a once skyrocketing stock index, and now shouldn't remain silent against appeals for it to rescue the bear market now.

If the stock market crisis spreads and jeopardizes China's economy, then the government's intervention will not count as a violation of the market's laws.

Reflecting on this pattern, the government should know its role and work only to lay a strong foundation for the future Chinese stock market. However, if the market system cannot lower transaction costs, cannot guarantee open, fair and just trading, cannot protect investors' interests, and if remains perpetually influenced by tight administrative controls, it matters little if the market is rescued or not; ultimately, it is hopeless.