The Law of Unintended Consequences
The Chinese stock market has drawn world attention from the recent sudden, sharp, and violent drop in share prices. Yesterday, the China Securities Regulatory Commission announced prohibitions from certain investors selling shares of stock. The objective, of course, is to stem the selling pressure which is causing stock prices to plummet. The desired effect is almost certain – price stabilization. But this outcome will assuredly prove short term. And, the cost could be huge.
As soon as allowed, those investors prohibited from selling will sell and those not prohibited presently will be encouraged to sell now before they do face prohibitions. Further, investors that may have considered purchasing shares must now contemplate whether they will be able to sell those shares when they wish to – and this uncertainty could very well have the perverse effect of reducing demand for shares at just the time when demand is desirable.
The regulators in China are traipsing down a dangerous path.
All comments or questions are welcomed.
Bob Bilkie, CFA®