Since the stock market was first established in China, Communist Party officials have never stopped talking about muckraking; but today China’s stock market is as deep in muck as ever.
The most recent scandal was on Nov. 11. The day was going smoothly, with rising indexes in both Shanghai and Shenzhen stock markets. By 14:45, 15 minutes before the market closed for the day, the increase rate was already over 2 percent.
But starting from 14:45, a huge amount of short sales occurred in the stock index futures. The trading volume reached 24 billion yuan (US$3.6 billion) in just 10 minutes, five times as high as a regular day’s volume.
Panicked investors fell into a frenzy of selling. In the last 15 minutes of the day, Shanghai and Shenzhen 300 Composite Index fell from 3554 to 3513.
A Brief Bull Market
Following nearly half a year’s price plunges and consolidation, the Shanghai stock index started soaring since Oct. 8. The rise of many individual stocks seemed to mark the start of a small bull market. As small and medium retail investors were quickly attracted into the market, online stock forums filled with excited discussions.
Prior to the Nov. 11 incident, against a backdrop of inflation, excess liquidity, a suppressed real estate market, and negative interest rates, the stock market was Chinese mid and smaller investors’ last footing.
By the next delivery date, Nov. 19, the stock index futures had fallen by 481 points, and the short sellers made exorbitant profits. The Shanghai composite index fell to 2807, leaving recent investors stranded.
Investors Burned
One investor blogged that the Nov.11 incident was highly unusual judging from over 10 years’ experience. In over a decade, it has been an unwritten rule that if the index rises by 2 percent or higher in the first three hours, there should be no drastic changes in the last hour.
What happened on Nov. 11 has raised many questions: Was this a conspiracy to manipulate the market?
Some bloggers noted that when the index started rising in October, about 20 brokers did not cover their short positions as people normally do, but instead shorted more shares. The bloggers predicted that if the stock market did not plunge significantly by Nov. 19, those brokers would suffer more than 1 billion yuan (US$150 million) in losses. But if the plunge did occur, they said the brokers would gain more than 1 billion yuan.
The bloggers were right. On Nov. 12, the stock index futures fell by 8 percent, while the Shanghai Composite Index fell by 5.16 percent, the biggest fall in 14 months. On that day alone, these brokers earned more than 600 million yuan (US$90 million) on their existing short shares. Shanghai and Shenzhen stock markets suffered a total loss of 500 billion yuan (US$75 billion). It was a catastrophe for small and medium retail investors.
Stock market manipulation is illegal in China. People urged the authorities to suspend the trading of index futures on Nov. 15 to protect the 200 million retail investors from suffering even greater loss—a possible loss of as high as one trillion yuan (US$150 billion). Investors also called for criminal investigations.
But so far, the authorities have not responded to these requests.
Previous Manipulations
Authorities were forced to investigate a manipulation case 15 years ago, however.
In 1995, rumors about an upcoming subsidiary for government bond futures boosted the prices. The price peaked when the subsidiary was officially announced. This left Shanghai Wanguo Securities, a primary short seller, facing huge losses. In despair, Wanguo dumped more than 211 billion yuan (US$32 billion) of bonds into the market eight minutes before the day closed. As a result Wanguo made an enormous profit, dearly costing those who purchased bonds that day.
Pressured by indignant investors, the China Securities Regulatory Commission (CSRC) had to investigate the issue, and announced all transactions in the day’s last eight minutes invalid. Later, Wanguo’s top official, Guan Jinsheng, was sentenced to jail.
In the past 15 years since then, China’s securities regulation has gone from bad to worse. While the manipulations continue, the regulators now play deaf. Some compare China’s stock market to a casino where investments far exceeds returns. But Chinese economist Wu Jingliang wryly observed that it’s worse than a casino.
Why? The answer may be found in a fund manager’s comment: “The last time I paid a visit to Vancouver, I found many former traders had settled down there. They’ve all bought houses for themselves. Where did they get the money? They made money from stock trades using investors’ money. Some traders conspired with listing companies’ senior management. They knew how to manipulate the propaganda even before the companies’ annual and seasonal reports were published. Most of the financial analyses were produced by hired writers. The stock market insiders have all profited from such speculations. It’s an open secret within the circle.”
On Nov. 18 the State Council circulated, “Comments on Punishing and Preventing Insider Dealing in Capital Markets” put together by five departments, including CSRC and the Public Security Bureau. Is this yet another trick meant to deceive the public?
China’s stock market is as dark as ever. Not because there is not enough regulation, but because the executers and interest groups are corrupt and without integrity. In a market like that, smaller retail investors are bound to be butchered.
Read the original Chinese article.
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