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”

Bloomberg Businessweek (Europe) - - Contents - −Bloomberg News

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.

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