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July 7, 2015

China Bans Equity Selling by The National Pension Fund

The volatility in the Chinese Shanghai stock index has been huge recently (4-8% intraday swings occurred almost daily last week) and the index is down roughly 27% from its June 12th peak.

The Chinese authorities at the People’s Bank of China have been doing everything possible to stop the selling. They have even gone as far as banning their national pension fund from selling stocks they can only buy!

Even with the drastic selloff the Chinese stock market is still up 12% year to date and up 83% from a year ago, so why are the Chinese authorities so desperate to intervene in the market?

The reason may be the drastic rise in stocks was fueled by a lot of latecomers using borrowed money (there were 12 million trading accounts opened in May alone!!). The fear is that a stock market crash could damage consumer confidence and actually damage the real economy. Ironically if authorities fail confidence in the government itself may be at stake.

Courtesy Otterwood Capital Management 

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