China's four-week-long stock market rout wiped out nearly 30% off the Shanghai Composite Index since its highs of June. To stem those losses the Chinese government has formulated an interesting hypothesis: stocks won't go down if you ban sell orders.
Working off this proposition Beijing has ordered shareholders with more than a 5% interest to stop selling shares; directors, supervisors, and senior management personnel are also barred from reducing their holdings.
China has also launched investigations on those it believes engaged in malicious short selling. The threat of imprisonment has proved an effective deterrent to those who may have been contemplating a short in the Chinese markets.
And even if you don't fall into either of the above categories of sellers you still will have trouble getting your money out of shares because two thirds of the stocks on the exchange have been halted.
It should come as no surprise that the Communist government of China has fallen off the free market wagon. After all, the government is of the belief that economies grow by building empty cities. So why shouldn't they think markets work best when not allowing participants to sell?
The reaction on Wall Street has been just as alarming. Deutsche Bank and Bank of America Merrill Lynch have applauded the Chinese governments for doing everything necessary to keep the bubble afloat.
But Wall Street's counterintuitive and ironic bullishness on China is most evident in the powerhouse investment firm Goldman Sachs. Goldman is urging investors to buy stock in China right now!
In Observing 40 years of statistical history the Goldman team in China believes “…the market is currently experiencing a standard bull market correction, not a transition into a bear market.” This is eerily reminiscent of the Wall Street models that concluded housing prices could never go down on a national basis.
First, I would like to know how anyone could get forty years of honest and consistent data from China. Then tell me where else in that forty year history of data did China expand its debt by $20 trillion dollars in the space of just eight years, as they have today?
