The power of Beijing's "brute force"
Three weeks ago Beijing managed to stop the panic with the use of what I called “brute force”, by which I meant that there was never likely to be much impact from interest rate moves, regulatory changes, margin relaxation, and so on. This is because there had been such a remarkable convergence among investors, almost all of who were purely speculative, on how to interpret information, and because any interpretation was likely to be self-consciously skeptical, that any regulatory response had to be completely unambiguous. There is nothing less ambiguous than buying or selling actual shares. In a July 8 message on GlobalSource Direct I argued that “the only way to create a credible floor, or to create credible expectations of rising prices, is by “brute force”. Beijing must force entities under its control, or entities it can influence, to buy shares until all uncertainty is removed.” The panic could only be stopped, in other words, by very visibly forcing institutions under state control to buy heavily, and to prevent them from selling. Other forms of signaling would not work. This is indeed what the regulators did, and they did it powerfully enough that by July 9 they had arrested the panic and set the market off on another surge.