What can the government do to move markets move in China?
CHINA FINANCIAL - In Brief 08 Jul 2015 by Michael Pettis
· Because China’s market is highly speculative, policies that are directed at improving the fundamental value of stocks will have almost no impact on market prices. · Uncertainty is currently so high that it will have sharply undermined the ability of speculators to agree collectively on how to interpret signals, or on how to judge the impact that technical or fundamental events will cause supply to drop or, more importantly, demand to rise. · Because the obverse policies are blamed for setting off the collapse, some policymakers believe that relaxing rules on margin, or lowering its cost, will have the reverse impact and will stabilize the market. It will not. Such policies can accommodate speculative purchases, but they cannot start the process until speculators are convinced · Speculators will only return to the market if they can be credibly convinced that prices are going to rise, or are credibly convinced that a floor has been established. · Recent events have seriously undermined the credibility of government signaling. · I suspect, consequently, 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.
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