WSJ: Shanghai Stock Market Lesson

An WSJ editorial says:

If U.S. stock investors think they're in pain, cast an eye to China, where the Shanghai market dropped 7% in May and 35% year-to-date as of Friday's close. And the government is making it harder for the market to get back on track.

The China Securities Regulatory Commission warned mutual fund managers Thursday to be mindful of "stability" when making investment decisions, meaning they shouldn't sell too aggressively into a falling market. The funds hold about a third of the market's actively traded stocks.

Beijing's move follows earlier measures to boost the market by cutting the stamp duty on stock transactions and adding regulations on large share sales. The message is supposed to be that the government will support the market and protect small investors. The assumption is that a stock market can maintain the Communist Party's prized "social stability" only if prices are rising. But the big losers from any bar on mutual fund stock selling would be the retail investors who may suffer bigger losses if fund managers aren't free to ditch losing stocks. The danger is that investors will speculate more on the next government intervention than on the relative merits of stocks, leading to misallocated capital.

To read more:

http://online.wsj.com/article/SB121236298088636381.html?mod=djemEditorialPage