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New York - Last week brought a setback for the development of efficient capital markets in China. The China Securities Regulatory Commission "suggested" to domestic fund managers that they avoid making any negative public statements about Chinese stocks. According to the South China Post, the securities regulator also required four financial newspapers to publish upbeat reports about the market.

We do not expect that this will do anything significant to prevent further volatility and losses in the stock market. Negative information will continue to flow through the internet and word of mouth, at least for those who are well connected. Institutional investors, both in China and abroad, will continue to be able to employ internal and external research analysts; it does not seem to have occurred to the Chinese authorities that there are thousands of analysts, consultants, market researchers, and economists who will continue to supply relatively high quality information to institutional investors. For those who can afford to pay for good research and information, the regulation is meaningless.

However, by preventing domestic fund managers and newspapers from issuing negative commentary to the public, the CSRC has ensured that small investors in China will receive even less useful information than they have now. In short, rather than preventing any slide in stocks, this measure gives institutional and foreign investors even more of an advantage over the domestic retail crowd. More than preventing "instability", we expect this legislation will only exacerbate the eventual pain felt by small investors.

In the past, Western observers may have been able to feel some smugness when developing countries adopted illiberal and inefficient regulations. However, given the recent decision by Western regulators to focus on rumor-mongering and naked shorting, as opposed to the fundamental problems that caused banks to be so vulnerable to rumors and short-sellers, we are hardly in a position to criticize the Chinese ban on negative commentary. The dislike of skeptics truly transcends all cultural boundaries.