The Trouble With Stoking Stocks

The word “artificial” is always a troublesome word to use in talking about a market event, since it inevitably implies that there’s some “natural” outcome that would otherwise have occurred, and the idea of the market as “natural” in turn obscures the fact that markets are always the products of particular social and political decisions. Having covered myself with that Al-Haigian caveat, though, last week’s decision by the Hong Kong Monetary Authority to intervene in that country’s stock market is as excellent an example of artificial price-boosting as you’ll ever find. And that decision is also as senseless a move as any a government can undertake.

Without oversimplifying at all, what the Hong Kong Monetary Authority did was step in and buy stocks on the Hang Seng Index, sending it up more than 8% on Friday. The HKMA did this despite the fact that Hong Kong’s economy has continued to slide deeper into recession while the Hang Seng, although seriously knocked down, has not tracked the broader economy’s descent. The HKMA explained its intervention, unsurprisingly, as a necessary move to counter the nefarious activities of “speculators,” who were depressing Hong Kong stock prices (“artificially,” the HKMA would say) and thereby wreaking havoc on the economy as a whole. In particular, the Hong Kong real estate market, which was at the heart of the speculative bubble which drove that economy in the years leading up to the 1997 crash, remains especially weak, and the HKMA is apparently hoping that a Hang Seng rebound would also bring money back into the real estate market.

How, exactly, a one-time intervention with state funds is supposed to alter investors’ attitudes toward the entire Hong Kong economy–for which the Hang Seng is, after all, just a proxy–remains completely unclear. Actually, that doesn’t quite capture the senselessness of the HKMA’s decision. It’s not really unclear how the HKMA will keep stock prices inflated in the long term, because it can’t. The thinking was clearly that the temporary boost in the market would force short-sellers (these are the dreaded speculators, since apparently you’re never a speculator if you’re gambling on the market going up) to cover their positions, which would drive stock prices even higher. But then what? The intervention doesn’t give people any reason to buy Hong Kong stocks, unless the HKMA is going to intervene as a matter of course. And sending stock prices higher while the underlying economy weakens just creates the conditions for a greater crash somewhere down the road.

In any case, it doesn’t look as if the HKMA’s move did send short-sellers scurrying for cover. The problems with Hong Kong have become so serious that hedge funds are willing to take short-term pain in the expectation of the eventual market collapse. And while there is something vulture-like about their stance, the lesson taught by the Japanese experience with the Nikkei in the 1980s and by most Asian economies in the late 1990s is that state-sponsored attempts to challenge “speculators” are both diversions from the government’s real role and, perhaps more importantly, doomed to failure. What the HKMA needs to recognize is that in the long term stock-market prices are essentially scale-readings on the real economy. You can change the way a scale measures weight, but it won’t make you any less out of shape. The real problem is that it may make you less willing to do the things you need to do to get back into shape.