Going with the flow in China’s roller-coaster stock market

To profit in the Chinese market, some look for manipulated shares “You just need to pull out faster than them”

To hear Liu Xiaozhen tell it, the only way to understand China’s stock market is to learn the tactics of traders who routinely manipulate it. “We need to dance with the wolves,” says Liu, chief executive officer of Qingdao Langwang Investment Consulting, a producer of online video seminars for stock investors based in China’s eastern Shandong province.

For a one-time payment of 6,800 yuan ($1,037), Liu’s company provides a crash course on stock manipulators in China: how to anticipate their targets, how to spot their trades, and how to profit by following in their tracks. The three-month class is one of at least 100 across the country that promise insight into Zhuang Jia, a local term for market manipulators that portrays them as holding the upper hand.

The courses are one way law-abiding investors are adapting to a market

that even China’s state-run media acknowledge has become rife with manipulation. Instead of avoiding suspected Zhuang Jia targets, many of the nation’s 99 million individual investors actively seek them out—hoping to profit from the artificial gains in manipulated shares, selling before they inevitably collapse. A book search on retailer Dangdang.com returns more than 200 titles on how to find, follow, and ride the coattails of market manipulators. “If you want to make a quick buck from the stock market, you’d better look for stocks with manipulators,” says Chen Yifeng, an accountant at a state-owned company in Shanghai who has about 100,000 yuan of his personal portfolio invested in local shares. “You just need to pull out faster than them.”

That strategy, while completely legal, is magnifying the challenge for Chinese policymakers as they try to improve the international image of a $6.4 trillion stock market where valuations often appear detached from economic fundamentals. Global money managers cut their holdings of mainland shares by about 5 percent in the first nine months of 2015, even after authorities made it easier than ever to bring money into the country. “It’s difficult for foreign investors who manage funds to justify jumping in” when the stocks they buy could be subject to manipulation, says Andy Xie, an independent economist in Hong Kong who previously worked for the World Bank and Morgan Stanley.

Foreign investors may also be discouraged by government intervention in the market. When a six-month ban on selling by major shareholders was announced in July, it was criticized by money managers including Templeton Emerging Markets and UBS Wealth Management. On the first trading day of 2016, Chinese shares fell 7 percent, prompting government-controlled funds to buy shares to help stabilize the market the following day, according to people familiar with the matter.

The most common form of manipulation is the classic “pump and dump” scheme, says Gan Jie, a professor of finance at the Cheung Kong Graduate School of Business in Beijing. The perpetrators establish positions in a stock and promote it to outsiders, seeking to inflate the share price before selling out. China’s market is particularly vulnerable to such schemes because it has so many unsophisticated investors, Gan says. Individuals account for more than 80 percent of trading on mainland exchanges, compared with about 15 percent in the U.S.

While manipulation cases in developed countries such as the U.S. often involve penny stocks with tiny market values, Chinese authorities are punishing traders for targeting multibilliondollar companies. The China Securities Regulatory Commission (CSRC) levied a 19.9 million-yuan fine in September on Ye Fei, one of the country’s bestknown hedge fund managers, after saying he manipulated five stocks including that of Beijing Xinwei Telecom Technology Group. The developer of network equipment has a market value of 75 billion yuan, on a par with Alcoa, the biggest U.S. aluminum producer.

Ye, the general manager at Yitian Investment, says he used “inappropriate methods” when trading shares in May and June, according to a letter to shareholders published on Yitian’s website in September. Ye couldn’t be reached for comment.

China’s state-run media began drawing attention to the manipulation problem in late 2014, with a November article by the official Xinhua News Agency saying the market had moved into a “New Zhuang Jia Stocks Era.” The piece warned that manipulators were using Internet posts and online messaging services to drive up share prices before dumping holdings on individual investors. The CSRC organized a special probe into manipulation in July during the height of last year’s selloff, spurring speculation that authorities were seeking to deflect blame for a bust that many analysts say was fueled by lax regulation of leveraged investors.

At Langwang, the

“If you want to make a quick buck from the stock market, you’d better look for stocks with manipulators.”

——Accountant Chen Yifeng

investment seminar firm whose name translates as “wolf king,” students learn to track rapid price and volume changes that deviate from movements in the broader market. Those are telltale signs of manipulation, says CEO Liu. The best way to piggyback on the gains, he says, is to build a “trial” position with a stop-loss order designed to limit damage if the stock reverses. “The regulatory crackdown will certainly have some impact,” Liu says, “but market manipulation will continue. It’s inevitable.”

The bottom line With individuals accounting for more than 80 percent of trading, China’s stock markets are especially vulnerable to manipulation.