Chinese stocks have continued their rebound today, with Shanghai's SSE Composite Index (SHA:000001) up over 5.5% at around midday today (AEST). The last two days have marked the strongest rebound since the Chinese market started falling in mid June.
As the chart below shows, the Shanghai market is up 90% in the past year, even after falling over 20% in the last month.
It's highly likely that the rebound we're seeing at the moment is due mainly to some fairly extreme measures that the Chinese government has taken to arrest stock price falls. For example, short sellers have been threatened with arrest, various deep-pocketed government institutions have promised to buy shares on the market, and over a thousand companies have had trading in their shares suspended, simply to prevent the sell-off.
It has also been reported that major shareholders have been banned from selling stocks and that companies are being encouraged to support their share prices through buying back their own shares, as well as various other measures.
These measures have been successful in arresting the market freefall — for now — but it's impossible to suggest, with a straight face, that the Chinese stockmarket is "free." Indeed, forbidding share sales and suspending trading may simply serve to undermine long-term confidence in the Chinese market. After all, the prospect of being forbidden to sell shares might make investors think twice about buying shares in the future.
For my money, this rebound won't last for long. And even if it does (which it might), there will be ramifications for China eventually, since restrictions on selling shares are bound to undermine confidence in capital markets in the long term.
