Jake's View

Why China’s market regulators love to hate George Soros so much

Casting blame is convenient for the China’s state apparatus

PUBLISHED : Wednesday, 24 February, 2016, 3:41pm
UPDATED : Wednesday, 24 February, 2016, 3:41pm

In his speech to senior CSRC officials, [new chief securities regulator Liu Shiyu] said the commission’s main tasks included... checking for market manipulation, as well as actively guiding funds into the stock market...

Business, February 24

If you have not heard it from me before, the absolute classic on playing the market is Reminiscences of a Stock Operator by the early twentieth century American speculator, Jesse Livermore.

Livermore is otherwise famous as the man who, on being mistakenly invited to a distinguished literary event and asked what he thought of the French novelist, Honoré de Balzac, replied, “Dunno, m’am. Never deal in them penny stocks.”

Livermore’s forte was the bear raid. He was dubbed the Great Bear of Wall Street and he did indeed make a great deal of his money by shorting the market, sometimes very heavily.

But he rarely, if ever, did it to manipulate the market. He was simply better than most other players at foreseeing which way the market would go and taking advantage of this insight to place his bets that way before others did so. Today we would just call him a very big day trader.

To the extent that he manipulated at all it was to prey on the would-be manipulators. He took delight in spotting their attempts to rig a share price and then knocking them out with big countervailing orders just before they hoped to cash in.

One big time manipulator active in the Shanghai market at the moment. It is the China Securities Regulatory Commission itself

I cannot claim to be a player in the same league as Livermore. My 20-year career in the investment trade was mostly as a research analyst. It is my view, nonetheless, that Livermore had sound reasons for his way of doing things.

While there is great prestige to be had among one’s fellows for a reputation of being able to push share prices around at will, very few people, if any, can do it consistently and the vast majority lose money trying it.

The point is that there has been a good deal of talk from Beijing recently of “malicious” foreign short sellers, George Soros prominent among them, deliberately trashing the Shanghai market.

The implication is that they are doing it not to make money but because they hate China for challenging America’s standing or because they are just straight racists.

I suppose there are indeed people like this but one of their characteristics stands out above all others. They are poor people. Throwing your money into your prejudices is an even better prescription than buying a boat for throwing it away.

Their biggest problem is the age old one that they will have to cover their short positions eventually and the market knows it. Yes, you can drive prices down by selling heavily but if eventually you have to buy it all back again you will just push prices up as much as you earlier pushed them down, in practise mostly further up.

It only really works if there are good reasons to think that prices are too high and, at the same time, good reason to think that they will fall imminently instead of doing so next year perhaps.

This perfectly describes Shanghai in summer last year. Local speculators had bought heavily on the reasoning that the stock connect project with Hong Kong would bring in a tidal wave of foreigners.

It did not and when it was apparent that as many had come in as really wanted in, the pin went into the bubble and the market deservedly crashed. Those who held short positions then were not malicious but just possessed of insight. The authorities actually have reason to thank them for stopping the nonsense at an early date.

I do know, however, of one big time manipulator active in the Shanghai market at the moment. It is the China Securities Regulatory Commission itself with this talk of “actively guiding funds into the stock market.”

The CSRC sees itself not so much as a regulator serving the interests of the investing public as it does an arm of the state tasked with inducing people to fund the state’s industrial ambitions and tough luck to them if they lose their money. We’ll blame George Soros.

Oh, how Jesse Livermore would have loved to stand in the market against a manipulator like that.