July 10 – A collective decision to rally

CHINA FINANCIAL - In Brief 10 Jul 2015 by Michael Pettis

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With the market up 5.2% by 1 pm, I think the “correction” is over. Analysts have pointed out the many reasons for skepticism, most importantly, I think, that over half of the listed companies have suspended trading in their shares. The full buying power that Beijing can command, plus the return of speculative buying, has been concentrated on a sharply reduced supply of shares. So how can we take the market’s revival seriously? Much of the buying was forced, and there were formal and informal restrictions on selling. One of my Chinese friends complained (although he went long early Thursday afternoon): “It is illegal to sell and illegal not to buy, so how can prices not go up?” In other words neither fundamental reasons (i.e. improvements in value) nor even technical reasons (i.e. more demand than supply) justify confidence that the panic is over and prices will rise next week. It was as if prices were simply legally required to rise, and so they did, and because this legal requirement cannot last, while technical imbalances still favor selling, you might think that the panic is far from over. But this is a speculative market in which the way information is interpreted has converged tremendously, and it seems that the reaction of the regulators and two good days have provided strong enough a signal to allow a collective interpretation. If today were not Friday, I would bet heavily that prices would surge again tomorrow, but because it is Friday, Chinese investors have two days in which to let the confusion and panic of the past two weeks gnaw away at their confidence in their collective response. If Beijing keeps a tight lid on the news and prevents anything from underm...