CHINA'S stockmarket sell-off continues, with the Shanghai Composite sell-off reaching 10% in a week and approaching 30% from the peak. Somoene must be to blame and the authorities are investigating "market manipulation" with some short-selling accounts suspended. Earlier this week, measures were announced to prop up the market, including a proposal to allow traders to pledge their houses in margin accounts; one of the craziest ideas ever announced. What next? Pledge your kidneys on commodity futures?
In this, China follows a long, ignoble western tradition of blaming short-sellers when things go wrong. In fact, there was a sudden bubble in Chinese stock prices, fuelled by margin buying; prices are now returning to normal. Short-sellers can act to deflate bubbles by betting against the trend but their activities are often restricted and, much of the time, it is an unprofitable business; to survive, they need to make money in bear markets. Stopping them now means there will be fewer shorts around, and...Continue reading
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