How to Destroy A Market, China-Style

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Shanghai YTD

A market, by definition, is a place where buyers and sellers can come together to exchange goods and services. That involves buying and selling those goods. Once you eliminate that free trading, you no longer have a market.

Then there is China, where the authorities have suspended the sale of half of the A share stocks. “Investors with stakes exceeding 5 percent must maintain their positions,” the China Securities Regulatory Commission said.

Throughout history, rules and regulations have slowly evolved to markets. Indeed, a certain level of regulation is desirable to ensure fair dealings, transparency and efficiency. By removing the ability to freely sell shares, the Shanghai Stock Exchange no longer qualifies as a market. I don’t know what it is, but if forced to come up with a name, the pursuit of accuracy would suggest calling it a government bureaucracy.

Lest you forgot, China remains a centrally planned autocratic regime ruled by the Communist Party. Niceties such as liquidity and free trading are deviant concepts. Pity Xiao Gang, the chairman of head of China Securities Regulatory Commission. The Wall Street Journalsaid he had “the toughest job in China.”

Let me suggest to Xiao that he might learn from the mistakes the West made in its recent crises.

During the dotcom bubble, Federal Reserve Chairman Alan Greenspan failed to do anything to reduce the speculative excesses. Day trading, excessive leverage, mediocre listing requirements all worked to allow a huge bubble.

Continues here: China Shows How to Destroy a Market



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  1. RW commented on Jul 9

    I would tend to agree as a general matter — covered short selling is clearly beneficial to market stability as a technical matter — but the policies that best serve the rulers of China remains something of a puzzle to me. That is, stock markets (like corporate entities generally) are government constructs in China just as they are here, so what is viewed as most crucial imperative there? If short selling were seen as defiance of a command or a sign of disloyalty for example it might be condemned and punished on that account alone.

  2. VennData commented on Jul 9

    Ronald Reagan’s Greenspan is a hero of the right. How DARE you say anything against a conservative! Ayn Rand is not a work of fiction but reality! Conservatives are ALWAYS right! Where is your confederate flag?!

    We all know that ending nickle spreads ruined the American markets China just needs Nickle spreads so floor traders can take a bigger toll. Then everything will be OK.

  3. DeDude commented on Jul 9

    Short sellers may be a source of people buying stocks after/during a panic fall in prices, but only after they have part of the selling (thereby helping to feed the panic and pushing prices further down). I am not sure that the final effects of short sellers (being gasoline on the fire during the panic, and water on it after a certain level of fall), is actually overall positive (although it is probably not nearly as negative as most think). A much better source of people buying stocks after/during a panic fall in prices is the people with “cash on the sideline”. In particular the people who have a 60:40 portfolio with % based or automatic frequent rebalancing. I think they are the people that limit stock market falls and initiate their recoveries.

  4. Futuredome commented on Jul 9

    Meh, they are just toying with the stock market and trying to set a plan for the future. It has little impact on their economy though chicken little’s will arm wave. The surge never made much sense. IMO, they did it on purpose so they could run some tests.

  5. Futuredome commented on Jul 9

    Greenspan had no tool to get rid of the speculative excesses easily. Boomer blowoff imo in the end. From a real investment perspective, the US began declining in 1996 believe it or not, when the labor force growth really began to slow down.

  6. willid3 commented on Jul 9

    well we call China communist, and they are in some ways, but lets not forget this is a dictatorship. not a democracy. the government is really in charge, they may do some of it behind the curtains. what is really odd, is that some of the most leading conservatives really like China. unless they use it as a bogey men for defense spending

    • odnalro zeraus commented on Jul 9

      Many party members of many parties – Communist, Republican, Democratic; etc. like different things for the same reason : MONEY!; whether defense or offense.
      One more comment : I understand those who hold THE MARKET sacred, as well as “the invisible hand” sacred and I tend to think that way, but I hate to be an hypocrite and must say – I’m sure he glad the Party stopped the slide. I imagine short seller were against that.
      And Willid3 do not kid yourself all governments are often ‘really in charge’ and do things behind the curtains, ask any whistleblower.

    • willid3 commented on Jul 10

      well in a dictatorship, and China is one, its not quite the same a democracy, where one person really rules the country. and they can do things in front of the curtains if they are so inclined in a dictatorship, while a democracy tends to have to do most things behind the scenes.

      its the difference between some telling you what to do when to do it and how, and you having to do it, and having some input to what is to be done.

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