Over the last month or so, many media outlets and fund managers have sought out my take on the China A share market crash, and what it could mean for the Chinese market in the coming 6 to 12 month period.
Taking into account the extreme measures put in place by the Chinese government, I do think the Chinese market will head higher and see all-time highs again, but not for the right reasons.
Why do I think China’s markets will rally?
Take a look at an article from the Financial Times this morning. It mirrors this ZeroHedge article and cites a Goldman Sachs note out this week that says the China “national team” — or the coalition of state financial institutions backing the market — may have already spent upwards of $144 billion USD to support the market. This amounts to about 2% of China’s total market capitalization.
In a situation where China has effectively not only banned short selling, but actual selling of securities in general, what should the market be expected to do? The government is forcing major brokerages, institutions, and ordinary retail investors to hold and buy China A share stocks while it pumps the market full of cash. These unprecedented actions, along with a mind blowing policy of forcing large stake holders of corporations to hold their current stock positions — 5% holders aren’t allowed to sell for 6 months, is of course going to create an artificial market bottom. On top of that, there’s been stories of the government arresting people for selling stock.
It would seem the laws of supply and demand, as well as free markets, take a backseat to what the Chinese government thinks is best for its markets.
It is with this in mind that I believe the China A share market will approach all-time highs again within a 6 to 12 month period as retail investors begin to believe the worst is over. As many are guessing, I believe the worst may only be getting started.
I saw the English version of this movie in 2006 and 2007, and I’m sure it’s not going to end well in Chinese — or any language, for that matter.