Since the its recent decline, the Chinese Government has greatly interfered with its market by forbidding the sharing of stocks, buying up stocks to prop up the market, and even sending the police force to check up on investment firms. The crackdown has been so extreme that a journalist was jailed for a negative article about the state of the Chinese economy. He was shown on national TV apologizing for the article. In his statement he said that he gathered information using private sources through abnormal channels and that he added his own subjective view into the article that he wrote. His arrest was one of only 200 arrests related to the downturn in the Chinese market. The cause for the majority of these arrests was “spreading rumors.”
Markets are by their nature volatile, they go up and they go down. The important thing to remember is that trying to manage and control markets only results in more volatility and uncertainty. As was shown at the end of August, the attempted control of the market only resulted in more volatility. Interfering with the market can have dire consequences that are often the opposite of the initial intention. This seems to be lost on the Chinese Government, during their investigations they collected massive amounts of market data and would question investors on their strategy including why they sold shares when the price was falling and telling managers simply not to sell stock. This crackdown has been especially difficult for short sellers and hedge funds that often use short selling to minimize risk. This lack of understanding of basic market functions and actions is dangerous for an entity with the power the Chinese Government has.
The Government’s crackdown has been a reversal in their usual dealings and interplay with the market as of late. Many see this as a reversal of their slow opening of their markets and their increased independence of the markets. This new heavy hand employed by the Chinese has spooked both domestic investors and foreign investors. This fear was only further substantiated by the Chinese Government taking into custody the head of the world’s largest publicly-traded hedge fund. The manager emerged later, denying she was detained and instead insisting she was meditating. At any rate the fear of the Chinese Government’s interference with its market is not prime soil for the growth or assurances the Chinese markets greatly need.
These prohibitions on sales are not the first time similar measures have been taken. The U.S. government took similar, although far more transparent, measures during the 2008 crash. Government intervention in the market is not new. The importance is in transparency and an understanding of the market without seeking to control what comes next.
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