In China, the government regulatory body that oversees stock transactions began an investigation into mass dumping of shares during recent declines, and like our Securities Exchange Commission, they intend to suspend, fine and eliminate these dastardly participants who undermine the good faith retail investors who helped drive the rally.
Like their US counterparts, the Chinese middleclass investor is the key player for providing liquidity, and having a group of rogue traders front-running retail investors by illegal shorting puts the entire "equity crap shoot" under the microscope.
You don't want marauding gangs of short sellers selling on downticks in front of the block mother who has equity Tupperware parties – that just won’t fly. But the ironic thing about the maturation of Chinese equities is that it looks very much like the US Market in the midst of the derivative crash in mid-1987, with a splash of 1999 Dotcom Bubble as a chaser for this volatile cocktail.
A Chinese Market Disaster, Sponsored by the Chinese Government
The problem with this scenario for China is that the government itself endorsed the Equity Tupperware parties and prompted Chinese investors to commit any available cash to these upstart companies by buying shares into strength - which is what takes down any asset bubble – it happened in American real estate and US stocks throughout our history - and it's happening in China now, because the retail average price is so much higher than where shares were at last sale. It creates panic selling, and it can flush an economy.
The cautionary story we need to pay attention to will come about as we break down who the rogue short selling criminals are. It better not be Goldman Sachs Group Inc. (GS) , Morgan Stanley (MS) or JP Morgan Chase & Co (JPM) - or we will have an international incident which cannot be solved by politics.
You don't want to pit the 300 million strong Chinese middle class (white hat) versus the seeds of capitalism represented by GS, MS and JPM (black hat) for front running Chinese moms and pops. This has been done to the aging American investor already in 1987 and 1999.
The result was that the US retail investor exited the market and left it to professionals – as Mega stock trading shares like Priceline Group (PCLN) , Boston Beer Co (SAM) , CME Group Inc. (CME) , Google, Inc. (GOOG) , Facebook, Inc. (FB) and Netflix, Inc. (NFLX) became too large to trade in this delicate momentum game, so the masses took to investing along the mid market cap space, where stock picking is much more treacherous. The Chinese market hopes to get where the US was in 1999, which funded the technology revolution that’s in place today.
The Chinese government will not let this happen to the growing baby duckling of a market - not if it intends to raise the lifestyle of the middle class and give hope to the 100 million millennials who will lead the country and pave the way for future investors. In short, this will not stand.
Steve Kanaval is the author of the upcoming Equities.com's Small-Cap Throwdown, a premium newsletter designed to help investors identify the best small-cap stocks to add to your portfolio and trading ideas to profit off them. The first issue pits the hottest beverage small-cap stocks against each other to find a winner. Sign-up here for a free issue today!
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