Diary

China is Not a Free Market

China has constructed an apparent free market which has attracted investors from around the world. The Shanghai skyline is a brilliant testament to the opportunities available in China, however its glare can obscure the risks of investing in a Communist-ruled regime.

The stock markets Beijing allowed to be built may work when everything is perfect, but once problems develop, they turn out to be merely alluring and carefully-painted images of free market exchanges, just as the Shanghai Stock Exchange (pictured) resembles an elaborate but fictional electronic game.

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Shanghai Stock Exchange (Photo credit Art Harman)

A free market, and in particular, market exchanges, require complete transparency, a free flow of information, and freedom of action by investors.

China is now censoring the internet of some information about the crash, and downplaying and hiding other news.  Words describing the “Black Monday” crash have now joined the unabridged-dictionary-sized list of banned words on China’s largest search engine, Baidu. The regime is also bullying journalists for their reporting on the crash.

A free market requires the free flow of information.

In July, Beijing prohibited shareholders holding more than five percent in a company from selling shares for six months, and banned new IPOs.

A free market requires that investors have the freedom of action necessary to protect their investments.

Investors have never trusted economic statistics dispensed by Beijing, and have been forced to build their own picture of the economy by tracking imports and exports, sales in China by western firms, housing sales, and other metrics. China’s great bubble was not accurately reflected in Beijing’s public statistics.

A free market requires transparency and honest statistics from the government.

China had the opportunity to show the world that it would abide by the accepted and expected rules of the free market before and during their crash. They took instead the road of statist control and censorship.

The lesson from China’s crash is simple. If you invest in China, do so with the knowledge that when push comes to shove, or if the rule of the Communist Party appears threatened, they will follow a predictable Communist-style model where the state may deprive you of the information you need at the moment you most need it, and then block your actions to protect your investments.