China's Bubble Bursting Efforts

A few weeks back I wrote about how China struggles with bubbles, just like us. One ongoing battle is to stop another stock market bubble from forming. In response they've taken a few steps to try to extinguish irrational investor exuberance. It doesn't seem to be working.

First, they tried to suspend new share offerings for a time, to let investors calm down. It was quite a suspension -- it started last September and just recently ended. But then, in case that didn't work, they put a mechanism in place in an attempt to simmer down trading in their Shenzhen exchange. The Financial times explains:

The Shenzhen exhange, which hosts mostly small- and medium-sized companies, adopted rules earlier this month aimed at preventing the wild fluctuations in new share prices which were common in China's IPO boom of 2007. The exchange said it would suspend trading in IPO shares for 30 minutes if prices rise or fall 20 per cent, and for another 30 minutes if they gain or lose a further 50 per cent.

Two new stock offerings would put that mechanism to the test. Did it work at calming down investors? Not exactly, according to the FT:

Guilin Sanjin Pharmaceutical rose and Zhejiang Wanma Cable both had their shares suspended for 30 minutes after rising more than 20 per cent on opening. But the moves failed to stop a huge rise on the first day of trading. Guilin, a Chinese traditional medicine maker, closed up 82 per cent at Rmb36.01, compared with the Rmb19.80 offer price while Wanma, a cable group, rose to Rmb25.93 from Rmb11.50.

So one stock went up 82%; the other went up 125%. From those numbers, it looks like investor excitement was alive and well. But it's too soon to tell if that exuberance was rational or irrational. After all, if prices never go back down, then it was never a bubble -- just growth.

This raises an interesting question: if this is still irrational exuberance, how do you stop it? They tried a several month-long share suspension. Didn't work. They tried putting a mechanism in place in their exchange. Didn't work. If time doesn't do the trick, how do you calm people down and make them think rationally?

I don't know that you do. One of the problems with markets is that they sometimes conflict with human nature. We are rational, but also emotional. It's those emotions that cause bubbles. I'm not sure how you eliminate emotion from human nature -- I don't think you can. And I don't think delaying satisfaction of excitement destroys that excitement. But if anyone out there has any ideas, feel free to comment away!