No reason to buy

CHINA FINANCIAL - In Brief 25 Aug 2015 by Michael Pettis

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There are four possible outcomes over the rest of this week. First, and this is highly unlikely I think, today’s measures could cause markets to stabilize Wednesday and start rising thereafter. This would do wonders for Beijing’s credibility, but I still think there are so many implied options and hidden convexities in the markets that as we started to approach 3,500-4,000 we would see another round of nervousness. Second, markets could simply stabilize at these levels. In such a speculative market, however, I don’t the markets do “stabilize”. Either there is a consensus that markets will rise, in which case they rise, or there isn’t, in which case they fall. Third, markets can continue dropping Wednesday, or they can stabilize and climb the rest of the week before dropping again. If this happens, it is probably in Beijing’s best interest that they are not seen as trying at all to prop up markets because this would only undermine their credibility further. And finally, Beijing might think itself already so committed to stabilizing the markets that we see additional measures, and sustained buying by the “national team”, over the next few days. In that case China would simply be doubling the bet, and so we would increase our expected volatility, with all this would imply for positioning.