AChina’s continuing to go absolutely bonkers. After a market crash of 30% that still leaves it about 70% higher than a year back, the Chinese Authorities have banned people from selling. Which as you might realize, is the stupidest way to stop the market from crashing.

These people can’t sell for the next 6 months:

  • Shareholders that own more than 5%
  • Executives and directors of companies

And Trading Halts, and Even Cops!

To stop their shares from falling further many companies are telling stock exchanges to halt trading in their shares.

The suspensions have locked up $1.4 trillion of shares, or 21 percent of China’s market capitalization, and are becoming increasingly popular as equity prices tumble. If not for the halts, a 28 percent plunge in the Shanghai Composite Index from its June 12 peak would probably be even deeper.

Some of these companies, it seems, have pledged shares and borrowed money. When share prices fall, lenders attempt to sell shares to collect as much money as they can, and that spirals into even more price falls. In India, we have a similar situation with pledged shares by promoters, though the typical lender in India wakes up about a month after a stock has already crashed.

(But it has happened. Lenders of companies like Unitech, Suzlon and others have sold shares pledged to them, and many recently.)

As usual, such crashes are blamed on short sellers. And China’s the kind of country that is quite likely to even execute people whenever it wants, and it’s now probing ‘Vicious Short Selling’ through the police! Never mind that they incited people to buy and borrow to buy; not just stockbrokers, even the Government pushed stocks onto ordinary people through state-owned media. Never mind that even farmers and factory workers bought stocks and if they bought at the latter end of the cycle, are hosed now.

What this will result in:

  • Stocks will crash even more (today’s 5% recovery is temporary – the selling has to return)
  • An entire generation will lose faith in the stock market

India has seen that in 2007. We didn’t do stupid stuff like banning selling but India regularly uses state owned institutions (like LIC) to buy stocks and “support” the market. In a steep fall, the results tend to be a disaster.

Intervention Doesn’t Work?

China fears what happened in Pakistan in 2008 – riots on the streets when the market crashed. Regulators, in response, shut down short-selling and even tried to set a “floor price” for the exchange, meaning a company’s stock price couldn’t fall lower than the previous day’s price. Guess what happened?

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After the ban, stocks stayed at exactly the same price. And in December 2008, when regulators realized this isn’t working, they yanked off the rules – and the market fell another 50% before recovering.  Today that index is at 35,000 – a 7x rise from the bottom.

Markets are built of excesses. They go too high, and fall too low.

New York Stock Exchange Shuts for Four Hours

In what they called a “glitch”, the New York Stock Exchange remained closed for four hours yesterday. There was no external force responsible, said the NYSE president, after it became obvious that everyone feared it was: Chinese hackers. We don’t know for sure if it was not, for it’s possible some of them were really pissed that they could no longer sell shares or something. Sounds like a plot for “Die Hard in China” with (who else) Bruce Willis and Jackie Chan.

We expect all markets to suddenly develop glitches when they are sliding down. NYSE might not have done it for that reason, but surely the Chinese exchanges are seeing this as an option.

Now, tell them about it: