Era of High Farce: China Establishes 'Investor Protection Bureau'
By Staff News & Analysis - January 11, 2012

China moves to protect investor interests … China's securities regulator announced here Tuesday that the country has established an investor protection bureau, in a move to better protect the rights and interests of Chinese investors in the capital market. The bureau, which has already been put into operation, will be responsible for drafting and reviewing laws and regulations that protect investors and help establish an education and service system for investors, said the China Securities Regulatory Commission (CSRC) in a press release. Despite a rising number of institutional investors, China's capital market is still dominated by individual investors, who often lack professional knowledge and are at the same time "insensitive but vulnerable to risks," said the CSRC. – Xinhuanet

Dominant Social Theme: In China, too, investors are now to receive the same magnificent level of concern and support that Western investors have access to.

Free-Market Analysis: Oh, boy. Here's what we call an elite dominant social theme – that the West and the East are not only converging economically but also in terms of regulatory competence and concern for the welfare of the individual consumer/investor.

Why is it an elite theme – a fear-based promotion of sorts? Because it is intended to impress on people that only the government can protect one (and one's family) from the depredations of the private sector. The massive government bureaucracy that must be levered at the problem du jour is the only way to tackle the issues of fraud and financial disaster.

The trouble with this (well, there are many problems) is that the Chinese financial marketplace is about as credible as the empty cities it is currently building and that citizens are buying for "investment" purposes. The Chinese have long memories of previous economic disasters but the boom is long as well. People don't quite know what to do.

The Chinese are buying gold and silver, of course, but the government is making that harder by restricting the bourses that offer money metals. What is most in supply is real estate, and thus the phenomenon of China's ghost cities.

When the false boom in China has finally run its course, these mold-riddled, empty cities may achieve some sort of mythical status right up there with Tulipomania and other storied disasters of fiat money. But right now, we're supposed to believe (along with the Chinese) that such distortions of the marketplace are normal because the Chinese innate discipline and hard work has finally been unleashed.

In fact, it's not even politically correct to question what is going on in China. The implication is somehow racist. The Chinese are finally coming into their own as their government has revised and reduced the oppressive policies of the past. The Chinese are finally getting the riches they deserve.

A communist society, one could guess, is in a sense more moral than a corrupt Western one. And the Chinese, having been kept down so long deserve to reap the fruits of their hard work, dedication, patience, brilliance, etc.

Some credit is also due to the ChiComs themselves that have undeniably shepherded the latest Chinese Great Leap Forward that has enriched so many. While the ChiComs are generally stricter when it comes to "justice," Western reporting has tended to treat this trait as simply a necessary part of a complex culture.

The manifold executions of drug dealers, pimps and prostitutes are to be seen within the larger cultural fabric which is apparently a great success. Never mind that the ChiComs no longer report on civil unrest throughout the country.

The anger over public corruption and abuses of power are so intense that apparently it would appear that China was undergoing a slow-motion "people's revolution" if the daily toll of riots and civil disruptions were to continue to be listed. The solution is apparently to ignore what's taking place. No story, no problem.

Meanwhile, the propaganda continues apace. The ChiComs' wholesale adoption (see story excerpted above) not only of capitalist attributes like a stock market but the regulatory environment that surrounds it as well are further evidence of ChiCom savvy and common sense.

Yes, we are supposed to conclude that this is a society that truly deserves what it has gotten and, by extension, what it is going to get. Not only are the ChiComs top-level technocrats, they are concerned ones. Here's some more from the article, dealing mostly with the growing phenomenon of Chinese securities and investing:

China has more than 72 million individual investors, accounting for 11 percent of the country's urban population, 80 percent of which only own stocks of market value less than 100,000 yuan (15,748 U.S.dollars), according to the CSRC. But they have contributed more than 80 percent of the total market turnover in 2011 …

They have natural disadvantages in obtaining market information and professional ability, which lead to easy infringements of their rights and interests, said the commission. The bureau will also assist the establishment of a remedial system to make up for the violated interests of investors, monitor the management and operation of the country's investor protection funds, and promote communication and cooperation with other investor protection organizations.

China's mainland had become the third-largest equity market after the United States and Japan by the end of 2011, according to the CSRC. Chinese Premier Wen Jiabao pledged at the national financial work conference over the weekend to enhance regulation of the equity markets to better protect investors' legal rights and interests.

We suppose Chinese investors are comforted by the progress that has been made as regards their protection. As far-away observers, however, we cannot claim to feel quite the same way. We have long been on record (longer than most publications) as pointing out that what is going on in China is a kind of wholesale erection of an economic, financial and investing Potemkin Village.

The ChiComs in this regard have been cleverer than Stalin. They have taken the Potemkin-izing of their culture and economy to a whole new level. Nothing is at is seems, from what we can tell, in the "new China." Least of all its capitalism.

We have read the stories by now. We don't even see how ANYONE, let alone the thousands of funds, hedge funds and individual investors that have piled into China and continue to invest there, can justify what they're doing. (Even if they can justify it, it seems to us that a larger level of introspection is called for.)

Just as it is with South American countries, a tiny elite evidently and obviously controls the levers of power. Insider reports tell us that the banks, financial institutions and large industrial corporations are all in a sense managed by the ChiComs. A certain level of purported competition is tolerated, but even here there are reports that the competition is basically choreographed from the top down.

Where there IS competition, is at the local level. Here, farmers and cell-phone salesmen scratch out livings within the context of fairly merciless competition. It is true that real-estate entrepreneurs have gotten rich in the "new China" but this is only because the real-estate bubble is so intense and long-lasting. As it is with many such bubbles, those who are millionaires and billionaires now may not be in the future.

There is also a class of wealthy Chinese that have begun to add significantly to their wealth via China's emergent stock market. Again, we're not convinced that this wealth is merely the result of hard work and visionary thinking.

No, from what we can tell, Chinese investors read a lot of government-sanctioned news in order to find out what the government itself favors. The companies and stocks that apparently do well are those that are favored by the ChiCom elite. In other words, in the current environment those who can read and who have a modicum of capital can prosper.

How long this will last is anybody's guess. The idea that one can make a fortune simply by divining what the government pushes is surely a comforting – and enticing – current reality. But is it a recipe for long-term enrichment? What goes up must come down … eventually.

Sooner or later, we figure, there's going to be some sort of hard landing in China. It may even be happening now. The alternative is to believe that central-banking run economies like China are endless fountains of wealth and that the ongoing over-printing of money is a one-way ticket to prosperity.

It occurs to us that the establishment of this new "investor protection bureau" is not exactly what it seems. Our (admittedly cynical) hypothesis would be that either the ChiComs are anticipating a severe market downturn and want to appear to have systems in place to cope, or they are perhaps putting these systems in place to better keep up the pretense that China's system has become comfortingly Westernized.

Maybe there are other reasons. Bloomberg recently posted an article reporting that the ChiComs “actively” intended to push pension and housing funds to begin investing in capital markets, and to "encourage long-term investors such as insurers and corporate pension plans to buy more shares."

But how an Investor Protection Bureau will put off a day of reckoning is not clear to us. When the end finally comes for the over-stimulated and impossibly distorted Chinese economy with its hyper-money printing, unreported rioting and empty cities, it may not be pretty. The Chinese stock market will not be exempt from whatever crash is likely going to take place.

Edited on date of publication.

After Thoughts

Fortunately, there will be an investor protection bureau to ameliorate the pain that Chinese investors will doubtless feel. This regulatory authority will work just as well in China as it has in the West. Lucky speculators!