BEIJNG, February 22 (AsianFin)—Wu Qing, the chairman of the China Securities Regulatory Commission (CSRC) appointed just before the Spring Festival holiday, held successive symposiums from the first working day of the new year to listen to suggestions from all sectors. According to representatives attending the symposium, Wu said clearly that feasible suggestions would be implemented as soon as possible; if not, an explanation would be given.

The move of CSRC’s new head to open up the floor for discussion has boosted the market confidence. Sina Weibo launched a special topic hashtag #MyAdviceToChairmanWuQing#, and many talented individuals offered their insights and suggestions online.

However, I took this wave of "advice-giving" with a pinch of salt.

In terms of expertise, Chairman Wu Qing is probably no less competent than any of his predecessors. Unlike those with work experience in the banking system, Wu is a seasoned securities professional who has spent nearly twenty years in charge of important business departments within the CSRC, specifically dealing with broker risk management, directly overseeing institutional investors, and also serving as the chairman of a stock exchange.

He was a stock investor himself years ago. Wu admitted that he had traded stocks in his early years and closed his account upon joining the CSRC, according to investor representatives who attended the symposium.

From being a retail investor, to working at a financial institution, brokerage, stock exchange, and the CSRC, Wu has deeply engaged with each crucial link of the capital market. Such diversified experience in a person has never been found in the financial industry, let alone among his predecessors.

That being said, the new head did not act autocratically; instead, he lent his ears to advice, showing respect for opinions and responding to market concerns, which conveyed the authority’s sincerity to stabilize the market and bolster confidence. As for the problems plaguing the market, he knows them as clearly as anyone else.

China’s A-share market has developed for over 30 years to a maturity, which took 100 to 200 years for developed countries to build. The necessary systems and rules are basically put in place. Based on people’s opinions and suggestions, it takes concerted efforts of many other departments to jointly address the weakness.

In fact, since the stock market spiraled downwards at the end of 2023, CSRC and relevant authorities have taken measures, including slowing down the pace of IPOs, tightening control over share reduction, suspending margin trading, restricting short selling, investigating fraud, cutting interest rates and reserve requirement rates (RRR). However, the results still fell short of market expectation.

The new head gives people a decisive and pragmatic impression. With so many suggestions offered, if we were to act on them immediately, what if the results again fall short of expectations, or even backfire?

I'm not being an alarmist. Experienced investors might recall the "circuit breaker" incident in 2016. At that time, against the backdrop of a stock market crash, it was advised to implement a circuit breaker mechanism that would automatically suspend trading when stock prices fell by 5% and 7% thresholds.

The intention of this mechanism was to buffer the decline, but it ended up intensifying the market panic. After the circuit breaker was lifted, all stocks headed straight for the limit down. During several trading days, thousands of stocks hit the limit down after just about fifteen minutes of trading, leaving professional investors nothing to do. Who could have foreseen that?

I would like to offer a piece of advice to Chairman Wu: respect the market and be cautious with "innovation".

The stock market downturn since August 2023 is caused by complex reasons. In hindsight, margin trading and snowball products played a role in exacerbating the decline in the following stages.

Margin trading is common in mature markets, and its supporters believe it can increase market liquidity, reduce investor costs, and optimize resource allocation. Introducing margin trading to the A-share market was certainly not intended to facilitate short selling. However, restricted shares in the A-share market can flow to the secondary market through margin trading, effectively bypassing the restrictions and creating a loophole.

In the later stages of this stock market downturn, many fund investors found that while they kept buying more shares of the funds, the fund companies lent out their holdings to short sellers through margin trading, who then sold them off.

In the midst of a rapid decline, quantitative funds could dump billions of shares in a minute, many of which likely came from margin trading. This led many to lament: "It's impossible to buy enough, just impossible..."

This behavior falls between normal trading and market manipulation, and its definition requires a final judgment from the judicial department. However, the consensus is that margin trading has a systemic flaw in the restricted shares segment and has fueled the downturn.

As for the snowball product, it is a type of financial product packaged as a put option sale. Many investors, unaware of the details, buy in hastily, expecting only a few percentage points of return, yet they have to bear the risk of losing their principal.

In the later stages of this market downturn, a large number of snowball products approached the knock-in zone, and the market formed a short-term synergy with the goal of “bursting the snowball”, thus leading to an accelerated decline.

This synergy is not necessarily a premeditated conspiracy, but more of a consensus among market participants under short-term trends, like sharks in the sea that, upon smelling blood, will flock to devour the wounded.

The margin trading and the snowball products both have innovative elements when they were introduced. It is certainly wrong to pin the blame on them for the stock market crash. However, it is true that fact that they came into play in this downward spiral.

The capital market is unpredictable and vast, with numerous participants, and its complexity and professionalism are unparalleled when compared with other fields. Even top experts cannot guarantee that a certain system or innovation will deliver the expected results.

Take a highly applauded suggestion for example. Some scholars claim that it is unfair for institutions to engage in T+0 short selling while retail investors can only do T+1, and it should be changed to T+0. "T+0 trading allows for stopping losses on the same day, and if mistakes are found, they can be corrected in time to reduce losses, which is beneficial for protecting investors because it's easier for small boats to turn around."

This argument indeed makes sense. I am not against T+0, but I am not confident about its effects, that is, whether it can truly benefit private investors.

Not to mention, in the early 1990s, T+0 trading was implemented on the A-share market for a few years. From January 1995, T+0 was changed to T+1, also at the request of the majority of retail investors, on the ground to protect private investors.

Even with the best intentions, if they are considered in isolation without any issues, has there been a consistency assessment, a comprehensive consideration of the impact on different market entities, the potential variables in the games that stakeholders might play, and the possibility of creating a "composition fallacy"?

With so many lessons and such a high cost, can we afford not to be cautious with the design of stock market systems and product innovation?