The Chinese government is effectively manipulating the Shanghai stock market (reducing supply and increasing demand). It has restricted trading in certain stocks (reducing supply), outlawed short selling (reducing supply), told certain large investors that they couldn't sell certain stocks for five years (reducing supply), encouraged government-owned banks and insurance companies to step into the market to bolster stocks (increasing demand), reduced margin interest rates (increasing demand), etc. The result is that the recent free-fall in the Shanghai market has been arrested ... see below:.
Is this a good thing? Somehow I doubt it, because history has repeatedly shown that government "price controls" never work. However this Chinese government market interference differs from past price controls in that it is encouraging price increases, not discouraging them. One might also point to our Federal Reserve Bank insofar as its actions over the last seven years have clearly done effectively the same thing ... flooding our economy with liquidity and holding interest rates at near zero. So maybe China is just learning from our experience ... only taking it four steps further.
My spider senses tell me that this type of inverted price controls by a government will also not work, but that they take a longer time to fail ... and the cathartic consequences may be far more devastating.
New economic theory and history is now being written.
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