But is there a speed bump?

CHINA FINANCIAL - In Brief 30 Jul 2015 by Michael Pettis

There was one measure about which there is some disagreement as to its size and its importance, but this might be more than counterbalanced by the very simple and clear signal it gives. Sorry for repeating my earlier messages, but here is what I wrote back then: "I realize this is very abstract, but it might help make things a little clearer to consider one of the best-known of the measures employed over the desperate weekend of July 4-5. This measure is described in a recent article in Caixin, which describes a meeting held by the CSRC involving the heads of China’s 21 largest brokers: ‘The firms announced in a joint statement that to stabilize the stock market they would spend at least 120 billion yuan combined to buy exchange-traded funds linked to blue-chip stocks listed on the Shenzhen and Shanghai bourses. Moreover, the firms pledged to hold all stock that had been bought with their own money until the index reached at least 4,500 points’” “Why would this matter? Because if brokers are holding large amounts of shares that they are eager to sell, but cannot do so until the index hits 4,500, this creates a barrier, or at least a speed bump, at around 4,500 whose impact as the market races up is hard to determine. This acts effectively as a kind of call option that investors must give away any time they buy stocks while the index is below 4,500.”

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