CHINA'S stockmarket sell-off continues, with the Shanghai Composite sell-off reaching 10% in a week and approaching 30% from the peak. Somoene must be to blame and the authorities are investigating "market manipulation" with some short-selling accounts suspended</a></strong>. Earlier this week, measures were announced to prop up the market, including a proposal to allow traders to pledge their houses in margin accounts</a></strong>; one of the craziest ideas ever announced. What next? Pledge your kidneys on commodity futures?
In this, China follows a long, ignoble western tradition of blaming short-sellers when things go wrong. In fact, there was a sudden bubble</a></strong> in Chinese stock prices, fuelled by margin buying; prices are now returning to normal. Short-sellers can act to deflate bubbles by betting against the trend but their activities are often restricted and, much of the time, it is an unprofitable business; to survive, they need to make money in bear markets. Stopping them is a form of market manipulation in itself. And it means there will be fewer shorts around, and more scope for future bubbles.
But the real problems are caused by the "naked longs"</a></strong> who speculate on rising prices. Such speculation is often encouraged by central banks, who cut interest rates when markets wobble, but do nothing when prices rise. High stockmarkets are seen as signs of confidence; they make everyone, including politicians, feel good. But eventually bubbles burst and if they are fuelled by leverage, they cause a lot of economic damage. Nobody ever investigates market manipulation when prices are rising because the authorities are often the manipulators.
As the small print ought to say "Share prices can go down as well as up, but not if the central banks and governments have anything to do with it".