In the face of the possible Panda Bear Market we discussed here yesterday, it seems that the guys who pull the levers in China have opted to prop up stocks rather than let nature take it’s course.
According to Reuters, they have three viable options to consider as the central bank tightens rates:
- Halt New IPO Issuance
- Sovereign Wealth Fund Buys Shares
- Speed Up Approval Process For New Mutual Funds
I bet they do all three.
As far as stopping the issuance of new IPO’s, we’re basically talking about a highly anti-capitalist measure, but we are talking about China. The Chinese brand of capitalism is a lot like the lunch special at your favorite local Chinese take-out joint: You get one item from column a and one item from column b. So yes, like a capitalist country, you can go public in China, however, the government can ignore the forces of supply and demand and halt new ipo’s whenever it pleases. Thank you, come again.
The sovereign wealth fund involvement is nothing new, as China came out in support of it’s stocks in the wake of the Lehman meltdown last fall. We don’t have a leg to stand on here in the west, as investing in our own auto and finance industry is practically second nature for our government these days.
The new mutual fund approval option to me is the scary one. The deal is this: Like our own mutual fund industry here in the states, each fund has a charter that requires it to put the money invested to work in either stocks or bonds. They can only husband so much cash (usually 5% or so). If China approves a few dozen or even a hundred new funds, this will automatically lead to volume buying of shares in Shanghai as the managers literally have no choice once money is raised. This is as manipulative and crafty as it gets. I don’t like it.
China may end up using every item in the chest to prop up the market. But what happens when the props run out?