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12/30/2015

Dancing With Wolves: Why Chinese Traders Love Manipulated Stocks - Bloomberg Business

Dancing With Wolves: Why Chinese


Traders Love Manipulated Stocks
Bloomberg News
December 28, 2015 9:30 P M IST Updated on December 29, 2015 1:55 PM IST

Amateur traders try to ride coattails of market manipulators


Regulators are stepping up efforts to fight market abuses
The way Liu Xiaozhen tells it, the only way to truly understand Chinas stock market is by learning the tactics of
traders who routinely manipulate it.
We need to dance with the wolves, says Liu, the
chief executive officer at Qingdao Langwang
Investment Consulting Co., a producer of online video

QUICKTAKE

Chinas Managed Markets

seminars for stock investors in Chinas eastern


Shandong province.
For a one-time payment of 6,800 yuan ($1,050), Lius firm provides a crash course on stock manipulators in
China: how to anticipate their targets, how to spot their trades and -- most importantly -- 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, along with hundreds of books on the subject, show how law-abiding investors are adapting to a
market that even Chinas state-run media acknowledge has become rife with manipulation. Instead of avoiding
suspected Zhuang Jia targets, many of the nations 97 million individual investors actively seek them out -hoping to ride the artificial gains in manipulated shares and sell before they inevitably collapse.
If you want to make a quick buck from the stock market, youd better look for stocks with manipulators,
explains Chen Yifeng, a 37-year-old 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.

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Dancing With Wolves: Why Chinese Traders Love Manipulated Stocks - Bloomberg Business

That piggy-back strategy, while completely legal, is magnifying the challenge for Chinese policy makers as they
try to improve the international image of a $7.2 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.
Chinese securities regulators are hoping to tackle the problem at its source. Over the past few months, theyve
escalated a crackdown on market manipulators, ensnaring some of the the nations most high-profile money
managers and announcing more than 2 billion yuan of fines and confiscated gains. That comes after authorities
more than doubled the pace of manipulation investigations in the first half from a year earlier.
The regulatory focus on manipulation is a long
overdue policy measure, said Gan Jie, a professor of
finance at the Beijing-based Cheung Kong Graduate

QUICKTAKE

China's Managed Markets

School of Business. This isnt the first time authorities


have tried to crack down, but in terms of scale it is large. This is good for the stock market.
The Shanghai Composite Index rose 0.9 percent at the close

Multiple Manipulators
Gan says the most common form of manipulation in China is the classic pump and dump scheme, where the
perpetrators establish positions in a stock and promote it to outsiders, seeking to inflate the share price before
selling out. In some cases, multiple manipulators team up to trade shares among themselves, creating an illusion
of growing investor demand thats designed to attract momentum-chasing speculators, according to Oliver Rui,
a professor of finance and accounting at China Europe International Business School in Shanghai.
Chinas market is particularly vulnerable to such schemes because it has so many unsophisticated investors, Gan
said. Individuals account for more than 80 percent of trading on mainland exchanges, while one university survey
showed that more than two-thirds of the nations new investors at the end of 2014 hadnt received a highschool level education.

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Dancing With Wolves: Why Chinese Traders Love Manipulated Stocks - Bloomberg Business

While manipulation cases in developed countries like the U.S. often revolve around penny stocks with tiny
market values, Chinese authorities have punished traders for targeting multi-billion dollar companies this year.
The China Securities Regulatory Commission levied a 19.9 million yuan fine in September on Ye Fei, one of the
countrys most well-known hedge fund managers, after saying he manipulated five stocks including Beijing
Xinwei Telecom Technology Group Co. The developer of network equipment has a market value of 75 billion
yuan, on par with Alcoa Inc., the biggest U.S. aluminum producer.
Ye, the general manager at Yitian Investment Co., said he used "inappropriate methods" when trading shares in
May and June, according to a letter to shareholders published on Yitians website in September. Ye couldnt be
reached for comment and a Yitian employee, who wouldnt give his name, declined to comment when contacted
by Bloomberg News.
This years most high-profile target of Chinas manipulation crackdown was Xu Xiang, who ran some of the
countrys top-performing hedge funds as the head of Zexi Investment in Shanghai. Xu was detained in
November and police froze $1 billion of shares in listed companies tied to the money manager. Efforts to
contact him for comment have been unsuccessful.

Investigations Increasing
While the CSRC doesnt publish estimates on the prevalence of stock manipulation, it does release figures on
manipulation cases pursued by regulators. The latest data show 31 investigations in the first half, versus 15 for all
of 2014 and eight in 2013. In October, regulators said they had prosecuted 12 market manipulation cases with
fines and confiscated gains totaling 2 billion yuan.
In a response to questions from Bloomberg News on Dec. 18, CSRC spokesman Zhang Xiaojun said that data
on market manipulation cases for the second half will only be compiled at year-end. He said the CSRC has
teams at branches across the country who monitor for signs of misconduct, including stock manipulation, without
providing specifics.
Market manipulation in China is probably widespread in part because the market is still in the early stages of
development, according to Rui, the finance professor at CEIBS in Shanghai. He compared the country to the
U.S. during the 1920s, when pump and dump syndicates were common and the investing public often tried to
benefit from the resulting share-price gains.

No Meat
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Dancing With Wolves: Why Chinese Traders Love Manipulated Stocks - Bloomberg Business

Todays mentality in China also has echoes of 1990s Japan, where reports of manipulation routinely showed up
in financial tabloids and libraries were stocked with books on how to trade in manipulated shares, known locally
as shite kabu.
While the popularity of piggy-back trades has diminished in the U.S. and Japan, those markets are by no means
free of concerns about manipulation. Spoofing, when a trader places orders they have no intention of filling to
move markets in their favor, has come under worldwide scrutiny this year as the rise of computerized trading
made the bait-and-switch scheme more effective.
Of course, not all individual investors in China are chasing after manipulated stocks. Zhang Kai, a 27-year-old
consultant at a financial firm in Beijing, sold his personal equity holdings in June in part because he thinks
amateur traders will struggle to make much money in shares where Zhuang Jia are active.
"Its possible for individual investors to enjoy some soup if they follow the Zhuang Jia, but they can never eat the
meat in the end, he said.

Market Crash
Chinas state-run media began drawing attention to the manipulation problem late last year, with a November
article in 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.
Policy makers stepped up their rhetoric against manipulators after a crash this summer that erased $5 trillion of
stock-market value. The CSRC organized a special probe into the issue during the height of a selloff in July,
spurring speculation that authorities were seeking to deflect blame for a bust that many analysts say was fueled
by lax regulation of leveraged investors.

Finding scapegoats is probably one goal of the crackdown, but its also part of the governments long-term
effort to professionalize the stock market and lure more international investors, according to CEIBSs Rui. If
China wants to achieve its ambition of turning the yuan into a global currency, policy makers will have to
convince overseas fund managers they can keep market abuses to a minimum.
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Dancing With Wolves: Why Chinese Traders Love Manipulated Stocks - Bloomberg Business

Its difficult for foreign investors who manage funds to justify jumping in when the stocks they buy could be
subject to manipulation, said Andy Xie, an independent economist in Hong Kong who previously worked for
the World Bank and Morgan Stanley.

Wolf King
Changing investor attitudes will be difficult. While the CSRC says its public announcements on manipulation fines
and investigations help educate investors on the dangers of Zhuang Jia, a search on online bookstore
Dangdang.com returns more than 200 titles on how to find, follow and ride the coattails of stock-market
manipulators.

"Death of Zhuang Jia" by Chen Siwen Source: Hangzhou


Blue Lion Cultural & Creative Co., Ltd.

At Langwang, the investment seminar firm whose name translates to wolf king, students learn to track rapid
price and volume changes that deviate from the broader stock market. Those are tell-tale signs of manipulation,
according to Liu, the firms CEO. He says the best way to piggy-back on the gains is by building a trial
position with a stop-loss order designed to limit damage if the stock reverses. If it rallies at least 5 percent, Liu
suggests adding to the position.
Stocks backed by major players and manipulators tend to perform much stronger, Liu said. The regulatory
crackdown will certainly have some impact, but market manipulation will continue. Its inevitable.
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12/30/2015

Dancing With Wolves: Why Chinese Traders Love Manipulated Stocks - Bloomberg Business

Before it's here, it's on the Bloomberg Terminal.

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China Sends Japan a Don't Meddle

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China Sends Japan a Don't Meddle


Message Via an Ex-Navy Ship

12/30/2015

David Tweed

Dancing With Wolves: Why Chinese Traders Love Manipulated Stocks - Bloomberg Business

James M ayger

DavidTweed
December 30, 2015 3:30 AM IST Updated on December 30, 2015 7:03 AM IST

China Coast Guard vessel No. 31239 Source: 11th Regional


Coast Guard Headquarters-Japan Coast Guard

Abe supports U.S. challenge to China's territorial claims


China is beefing up coast guard with former naval frigates
Tensions are rising in the East China Sea after China deployed an armed, former navy frigate for the first time to
challenge Japans control of contested islands in what may be an attempt to shift Tokyos attention away from
disputes in the South China Sea.
Three ships including the frigate still equipped with gun turrets and now operated by the Chinese coast guard
sailed within the 12-mile exclusion zone that Japan claims around the islands on Dec. 26, said a Japanese foreign
ministry official who asked not to be named, citing government policy. Japan lodged an official protest over the
incident.
The escalation in the East China Sea comes at a time of heightened tensions in the South China Sea after the
U.S. Navy began freedom of navigation patrols there to challenge Chinas claims in territorial contests with the
Philippines and Vietnam. Japan is home to the U.S. Seventh Fleet, which is leading the patrols, and backs the
U.S. effort. China has repeatedly urged Prime Minister Shinzo Abe to stay out of the South China Sea dispute.
China doesnt want Japan to meddle in the South China Sea, said Giulio Pugliese, an assistant professor at the
University of Heidelbergs Institute of Chinese Studies who specializes in Sino-Japanese relations. Chinas
engagement in the East China Sea and its constabulary build-up remind Japan of the risks of stretching out its
naval presence to distant Southeast Asian waters.

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Dancing With Wolves: Why Chinese Traders Love Manipulated Stocks - Bloomberg Business

naval presence to distant Southeast Asian waters.

Fragile Rapprochement
An increase in tensions risks a fragile rapprochement between the two Asian powers, whose relations have been
strained by the territorial dispute and lingering resentment over Japans wartime past. Abe and Chinese
President Xi Jinping have met twice since the end of 2014, though their pledges to reduce the risk of conflict
over the islands have produced few concrete results.
China has expressed concern over Japan seeking a more active security role in Southeast Asia as Abe this year
pushed through legislation allowing his country to send troops to the aid of allies under attack. Japan has initiated
a more proactive defense role in the region, agreeing to supply coast-guard vessels to the Philippines and
Vietnam and holding joint naval drills in June with the Philippines near the Spratly islands in the disputed South
China Sea.
Last month, Abe told President Barack Obama that hed consider sending maritime forces to back up the U.S.
operations in the South China Sea. Days later he said that his comments had been misunderstood and Japan had
no specific plan to participate.

Regular Incursions
China is interested in tying Japans focus to the East China Sea in case Tokyo might mistakenly believe that
the situation has already abated in the East China Sea so that it can start looking at the South China Sea, said
Collin Koh Swee Lean, an associate research fellow at the S. Rajaratnam School of International Studies in
Singapore.
The entry of the three Chinese ships into territorial waters around islands was the 139th incursion by Chinese
ships since September 2012, an official at Japans foreign ministry said Dec. 26. Since the beginning of 2014,
the number of foreign ships entering has ranged between four and 10 a month, with eight in November,
according to foreign ministry data. Any potential confrontation between the two sides over the islands risks
turning into a broader conflict as the U.S. is treaty-bound to come to Japans defense in the event of an armed
attack.

Modifying Frigates
China has been beefing up its coast guard by modifying naval frigates, according to IHS Janes Navy
International, which in July published photographs of frigates being painted coast-guard white from naval gray.
Both Japan and China deploy civilian coast guard ships to patrol waters they claim as territory to temper the risk
of confrontation with more heavily armed naval ships.
The Chinese coast guards converted frigate was fitted with auto-cannons, although the main armament has been
removed, the Japanese Ministry of Foreign Affairs official said. An auto-cannon is capable of rapid firing of
shells. IHS Janes said that one of the Chinese frigates being modified had had most of its arms removed, leaving
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12/30/2015

Dancing With Wolves: Why Chinese Traders Love Manipulated Stocks - Bloomberg Business

shells. IHS Janes said that one of the Chinese frigates being modified had had most of its arms removed, leaving
two twin 37 millimeter mountings in place.
The largest ship the Japanese coast guard has in the division covering the islands is the Ryukyu, which is similar
in length to the Chinese frigates and also equipped with two auto-cannons -- one 20 millimeter and the other 35
millimeter -- said a coast guard official who asked not to be named citing government policy. The Japanese
coast guard ships are considered to be more reliable and maneuverable than their Chinese counterparts.

Capability Gap
In the foreseeable future, more and more of the China coast guard ships entering the waters off the isles, or
even engaging in standoffs with Japanese coast guard, will be newer, larger and armed vessels, said Koh, who
studies Asian naval security. This ought to be worrisome insofar as the Japanese come to realize that the China
coast guard is fast bridging its capability gap, eroding the qualitative advantages Japanese coast guard has long
held over Chinas maritime agencies.
China is also adding to its naval capabilities in the South China Sea. On Dec. 25, three new ships began
servicing the PLA Navy stationed in the Spratly Islands, Chinas Global Times reported, citing the navys official
magazine. The ships include a transport and supply vessel, an electronic reconnaissance ship and an oceanic
survey ship.
In the East China Sea, ships from both nations have been tailing one another since Japan bought three
uninhabited islands from a private owner in 2012. Japan has administered the islands -- known as Senkaku in
Japanese and Diaoyu in Chinese -- since they were handed over by the U.S. in 1972 as part of program to
return territory held after Japans defeat in World War II.
China Foreign Ministry spokesman Hong Lei said Dec. 23 that the islands have been part of Chinas territory
since ancient times and that it was totally justified for Chinese coast guard vessels to patrol the waters. The
equipment on Chinese coast guard vessels is standard and no different from other countries, he said.
Before it's here, it's on the Bloomberg Terminal.

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Dancing With Wolves: Why Chinese Traders Love Manipulated Stocks - Bloomberg Business

Maritime Dispute Exposes Rifts in China's Foreign Ministry

Japan China South China Sea East China Sea Shinzo Abe Philippines

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