Bloomberg Businessweek (Europe)

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 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 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.

Newspapers in English

Newspapers from Bahrain