Mimicking stock market manipulators is a popular investment strategy in China


You will only truly understand the wild gyrations in China’s stock market by studying the tactics of those who successfully manipulate it.

That’s the amazing sales pitch of Liu Xiaozhen, CEO at Qingdao Langwang Investment Consulting, who offers investors a crash course on how to profit from stock market manipulation by mimicking the actions of those who do it.

According to Bloomberg, 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 practice, completely legal, encourages investors to trade in stocks that are targets of Zhuang Jia, teaching them to profit from the boom-bust cycles that often accompany stock market manipulation.

A form of snakes and ladders, if you will. Investors buy into to stocks that are rallying hard on suspected manipulation and then sell, hopefully before others do the same.

It’s a risky strategy, but one that many less-experienced and less-educated investors have adopted — both during the epic bull market seen earlier this year and in recent months following its equally amazing collapse.

The graph above, supplied by Bloomberg’s Tom Orlik on Twitter, reveals the education levels of new investors in China’s stock market as of April this year.

According to the research, 5.8% of all new investors couldn’t read. Over two thirds had an equivalent education level of junior high school or less. A lack of formal education, as well as investing experience, led to herd-like behaviour with stocks routinely rallying hard as investors followed the actions of others rather than using more traditional investment strategies like fundamentals or technicals.

While many of those investors likely suffered significant financial losses as Chinese markets near-halved between mid-June to mid-August this year, it appears that the same strategy of following the actions of others — in this case market manipulators — is still popular among investors.

Although programs such as the one offered by Liu are completely legal, Chinese authorities are attempting to stop widespread manipulation of stocks at its source — arresting, interrogating and fining many high profile money mangers in the country in recent months.

According to Bloomberg, the China Securities Regulatory Commission — China’s stock market regulator — levied a $19.9 million yuan fine in September on Ye Fei, one of the country’s most well-known hedge fund managers, after saying he manipulated five stocks earlier this year.

Xu Xiang, another high profile Chinese hedge fund manager, was also detained by police in November.

While those actions are targeting the private sector, decisions taken by the government during this year’s stock market rout — something that wiped around $5 trillion from the value of Chinese listed firms — help explain why looking for signs of stock market manipulation remains a popular investment strategy, and not just from local investors.

Some foreign investors, rather than crunching data on earnings and stock valuations to come up with investment strategies, actively mimicked the actions of China’s so-called “national team”— a group of state-backed financial institutions that were tasked with propping up share prices in the height of the market rout.

To some, the actions unwittingly encouraged short-term trading patterns that amplified market movements as investors raced to purchase stocks suspected to be the target of government-backed buying.

Although the intervention of the national team has now subsided, it reinforced short-term thinking among investors with suspected manipulation, rather than more sophisticated investment strategies, driving investment decisions.

It also buttressed the belief that the government will intervene in the markets themselves should prices move beyond a range they feel comfortable with.

With that form on the board, it’s little wonder why Chinese investors continue to favour risky strategies — more akin to a casino than an investment market — than those used in other, more established investment markets.

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