Insider Trading in Chinese Stock Markets? More on Chinese government’s blowing of her Stock Market Bubble

Chinese stocks reportedly surged prior to the announcement of interest rate cuts.

Has this been out of luck or from insider trading? 

The Wall Street Journal reports

A sudden surge in China’s stocks hours before Beijing cut interest rates on Friday has drawn complaints from some investors who suspect that word of the central bank’s surprise move was leaked to the market ahead of time.

Authorities have in recent years sought to crack down on insider trading in the country’s volatile stock markets. But the unusual rally adds to worries the illegal practice remains, giving big profits to those in the know but leaving an unfair playing field for other investors.

Shanghai’s benchmark index started the Friday morning session virtually flat, but after the midday break climbed 1.4% to just shy of its three-year high despite a lack of substantial market-moving news. Trading volume jumped 31% from the previous day.

The cut to borrowing costs was announced at 6:30 p.m. local time in Shanghai, three-and-a-half hours after the market’s close. Stocks in Shanghai rallied a further 1.9% Monday.

It could be combination of luck, momentum and insider trading.

 

But the following paragraph gives us a clue why the Chinese government has been inflating a stock market bubble. (bold mine)

Retail investors, who account for more than 80% of all transactions in China’s stock markets, have long complained that information appears to be disclosed unevenly. Beijing’s policy on approvals for new share offerings, which favors state-run enterprises rather than more profitable and innovative private firms, has attracted criticism as well.

Given that the housing markets have been on a steep decline, the Chinese government hopes that by providing “gains” on speculative activities to retail investors in the stock market, such would create “demand” for housing, thereby cushioning the current pressures on the housing markets. Of course Chinese retail investors have been noted to use levered money in order to speculate on stocks.

So the Chinese government’s cure to the housing oversupply financed by overleverage has been to entice the retail sector to lever up in order to pump a stock market bubble.

Such manipulated boom has been channeled directly via price controls of the IPO markets, and the HK-China stocks connect, and indirectly via stimulus and bailouts

The Chinese government’s push to stoke a stock market bubble via the IPO market can be seen via additional measures--the announced ‘liberalization’ of fund flows from IPOs conducted abroad. 

Notes the Bloomberg:

China scrapped some approval procedures related to initial public offerings, part of government efforts to cut red tape and spur private-sector investment.

Chinese companies no longer need a go-ahead from the foreign-exchange regulator to bring back money raised in overseas share sales, according to a State Council statement posted on the central government website today and dated Oct. 23. The government will also cancel the certification process for sponsor representatives, a qualification for investment bankers overseeing domestic IPOs, the statement shows.

Making it easier for companies to send proceeds back home may encourage more overseas share sales, easing the backlog of applications for domestic listings

As one would note, the Chinese government has been so desperate to secure funds that they now resort to “liberalization”, which unfortunately when things fail, will get the blame. 

In addition, given the colossal debt by local governments (estimated at $3 trillion as of June 2013) inflating stocks in favor of state-run enterprises as I noted last weekend is a sign that “Chinese government wishes to find alternative avenues for overleveraged companies to access funds”

China’s State owned enterprises according to Wikipedia are “governed by both local governments and, in the central government, the national State-owned Assets Supervision and Administration Commission” or are owned by the local, provincial, and national governments.

The thrust  of the Chinese government hasn’t been to generate real economic growth, but as signs of desperation, to inflate substitute bubbles in the hope to buy time, to meet political goals in the context of statistical growth and of a miracle.

Essentially, the Chinese government’s therapy to the problem of addiction has been to provide more of the substances which one has been addicted to. Doing the same thing (in a slightly different form) over and over again

Oh, those charts above shows resemblance with the “afternoon delight” in the Philippine stock exchange. The difference is that the above may have been a one day event in the Middle Kingdom but in the Philippines has become a norm. 

As a side note: Philippine stock operators have been visibly hurt in their plans to break the 7,350 from a ‘dump’ by an unexpected participant/s at the last minute, so they have come back with vengeance this morning with a relentless raw emotion driven manic buying episode to push index above 7,350. 

As historian Charles Kindleberger once noted of the hallmarks of manias (or market tops): The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom…And the signal for panic is often the revelation of some swindle, theft, embezzlement or fraud. 

How germane this has been today.