Peak Desperation: China Bans Selling Of Stocks By Pension Funds

What do you do when two policy rate cuts, $19 billion in committed support from a hastily contrived broker consortium, and a promise of central bank funding for the expansion of margin lending all fail to quell extreme volatility in a collapsing equity market?

Well, you can simply ban selling, which is apparently the next step for China.

According to Caijing, the country's national social security fund is now forbidden from selling (but is welcome to buy). Here's more, via Caijing (Google translated): 

Social Security informed the public fund social security portfolio not only buy sell stock


"Financial" reporter learned that the Social Security Council on Monday (July 6) Call each raised funds, social security portfolio is not allowed to sell their holdings of stock.


Sources said that Social Security Council has just informed all social security portfolio can only buy stocks can not sell the stock; and it is not defined as the net selling, but completely unable to sell the stock.

And a bit more from FT:

Financial magazine Caijing reported on Monday that the National Social Security Fund had told its external fund managers they could buy stocks but were not permitted to sell them.


Central Huijin, a unit of China’s sovereign wealth fund, also said on Sunday it was supporting the market by buying blue-chip exchange traded funds.

As mentioned above, and as discussed at length over the weekend (here and here), China is scrambling to counter an unwind in the country's various unofficial margin lending channels which have combined to pump between CNY500 billion and CNY1 trillion in borrowed funds into the country's previously red-hot equity market. 

The pension selling ban comes just days after China moved to curtail margin calls in a similary ridiculous attempt to stop the bleeding by simply making selling against the rules.

For their part, Moody's says the "lack of compulsory liquidiation" in margin accounts is probably a very dangerous idea:

Lack of compulsory liquidation rules in unmet margin call is credit negative for securities cos. because it weakens controls against losses, allows industry to increase risk.


Moody’s expects some cos. to aggressively incentivize clients to buy stocks on margin and allow value of collateral to fall below safe level to avoid damaging customer relationships, putting themselves in riskier position.

The takeaway: this is simply one more example (the insolvent US shale space and HY bond funds being two others) of forestalling the inevitable and in the process allowing already precarious situations to mushroom into speculative bubbles that have the potential to wreak untold havoc when the inevitable unwind finally comes. We'll close with the following quote (again from Moody's):
New rules [in China] appear to be attempt to stabilize market, [but] less discipline around liquidating positions and risk taking with securities cos. underwriting leveraged positions will sow seeds for greater market peril.