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Retail Investors Responsible for Market Volatility, States Guangyao

Zhu GuangyaoThe Chinese stock market has been taking a rollercoaster ride of late. The Shanghai Composite, the main index of China, showed heavy market swings that have scared foreign as well as domestic investors.

Although Chinese equities do not have a major global exposure, analysts say policymakers are bound to lose confidence in the country’s economic liberalization programs if these market swings continue.

Vice Finance Minister Zhu Guangyao said that the Chinese have a number of lessons to learn from these turbulences. Blaming the increase in number of retail investors for market volatility, he said,

So many retail investors made this market very difficult to supervise. But the people want (to invest in stocks) … so the Government has a responsibility to provide a good legal and market framework for them to do so.

The Shanghai Stock Exchange, at its lowest point, was trading 70% more than it was on the same date a year back. Guangyao says that the stock market is “naturally adjusting” at present. Responding aggressively to stock sell-offs, the Chinese authorities have prevented new lists to impose limits on supplies. In addition, the central bank of China has attempted to stabilize the country’s economic system by injecting extra liquidity and enterprises owned by the government have promised to purchase more stocks.

According to Guyangyao, the future of the country depends on the development of “mature markets,” such as those in the US and the UK. Speaking of the need for China to “learn from other countries,” Guangyao said that several factors such as use of illegal leverage and lack of financial education was responsible for the market swings. He said: “After the market stabilizes, we should emphasize education for people who want to invest in the stock market.”

Stating that retail investors comprise four-fifths of all shareholders, he said that China needs to develop institutional investors, adding that the country’s financial reform program will help achieve this.

Simultaneously, the finance minister said that the country is based on “very solid” financial fundamentals, coupled with decline in account deficit and increase in consumption. But he doesn’t feel that the previous growth rates will return, noting that the country has shifted to “relatively high growth” from “very high growth.” Over the following five years, he expects the country’s growth rate to be 7 – 8 percent per annum.

China’s budget provides for a 2.3% deficit this year, which is bigger than the 2.1% of last year.

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