Thursday, 9 July 2015

China changing the rules of the game

One thing I hate very much: changing the rule during the game. And that is exactly what seems to be going on in China, where the regulator banned investors holding more than 5 percent to sell shares for the next six months.

Will these extreme measures help? I doubt it. It will probably create artificial side effects, like a fund manager holding more than 5 percent in one holding and less than 5 percent in another. If there are redemptions in the fund then the manager has to sell. He would like to sell a bit of both holdings, but due to the new rules he cant sell the first holding, so has to sell much more in the one he has a smaller holding.

Companies will perform badly in the short term if most of their holding is held by shareholders who own less than 5 percent. All rather strange, to say the least.

From Bloomberg:

"China’s Stock Sale Ban Draws Scorns From Templeton, Wells Fargo"

Templeton Emerging Markets Group calls it an act of “desperation.” UBS Wealth Management labels it “extreme.” And Wells Fargo Funds Management says it just “postpones the inevitable.”

China’s decision to ban major stockholders from selling stakes in listed companies has drawn skepticism from foreign investors. The money managers, with combined assets of almost $4 trillion, say the latest step to stem the country’s equity rout is just another measure to meddle in the market and won’t be enough to restore investors’ confidence.

“It suggests desperation,” Mark Mobius, chairman of Templeton Emerging Markets Group, said by phone. “It actually creates more fear because it shows that they’ve lost control.”

The China Securities Regulatory Commission said Wednesday that investors with holdings exceeding 5 percent as well as corporate executives and directors are prohibited from selling stakes for six months. The rule is intended to stabilize capital markets amid an “unreasonable plunge” in share prices, it said.

While China has already ordered government-owned institutions to maintain or increase stock holdings, the CSRC directive expands the sales ban to non-state companies and potentially foreign investors who own major stakes in mainland businesses.

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