Shanghai Scrap

Back in mid-January, the economic geniuses who manage the Chinese economy announced that – in the face of rising inflation – they would institute price controls on key commodities. As I explained back then, and stand by now, the net result of such a policy can only be hoarding and additional inflation.

Which brings me to the latest example of heavy, ham-handed economic crisis management by Beijing’s regulators. The problem is simple and severe: the Shanghai Composite Index (the nation’s most important stock index) is down almost 35% for the year, and there is little prospect that it will rise. Regulators have tried tax changes to reverse this sad course (temporarily successful), and it has tightened listing rules (a good, long-term fix). But, despite these efforts, the market declines – along with the hard-earned invested savings of millions of inexperienced, middle-class Chinese investors.

So what to do?

One of the least remarked characteristics of China’s economic bureaucrats is their dearth of real life experience with economic crises. Unlike economic regulators in, say, in Europe or the United States, few have ever weathered economic hardship from the helm of an investment firm or company. And so, in reality, few have any experience or sympathy with the market (or real life). As a result, in the face of crisis, they often revert to form – authoritarian form (ie, price controls) – when commonsense and experience would dictate patience.

Case in point: according to yesterday’s South China Morning Post [subscriber only], China’s Securities Regulatory Commission organized a meeting of top Chinese mutual fund managers on Thursday and told them:

… mutual funds should support falling stocks even though other investors were selling their holdings amid the slump in the nation’s equity markets … and warned them of “administrative punishments” if they breached the principle of market stability, according to a Beijing-based fund manager with knowledge of the meeting.

Neglecting, for a moment, a discussion of how this policy is a complete and total violation of the very principle of free and independent equity markets, let’s consider whether and how this will work. Presumably, the invited fund managers won’t sell their holdings into the declining market. But, at the same time, with their cash flow limited, they will be restricted in their ability to buy into the declining market. After all, who wants to buy an investment that can’t be sold?

Which is to say that – by eliminating sell pressures – the authorities have succeeded in eliminating any and all incentives to buy into the declining market. Way to go. Down.