Chinese Pump and Dump: Zhuang Jia
Joseph Peterson draws parallels between market manipulators in Chinese stock markets and the domain name market.
An article just published by Bloomberg gives us an x-ray glimpse into a Chinese investment culture reliant on pump-and-dump schemes. The parallels with domain market activity during 2015 are so obvious that even this sentence feels a bit redundant.
A Shanghai accountant sums it all up:
If you want to make a quick buck from the stock market, you’d better look for stocks with manipulators … You just need to pull out faster than them.
Bloomberg cites Gan Jie, a professor of finance at the Beijing-based Cheung Kong Graduate School of Business:
Gan states 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 ahead of selling out.
Yet another expert, Oliver Rui, professor of finance and accounting in Shanghai, is credited as saying:
In some cases, multiple manipulators team up to trade shares among themselves, creating an illusion of growing investor demand that’s designed to attract momentum-chasing speculators …
As stated by Bloomberg, late in 2014 the official Chinese media published a piece warning that
manipulators were using Internet posts and online messaging services to drive up share prices ahead of dumping holdings on individual investors.
Inside China, this practice of “Zhuang Jia” is far from secret. It’s even publicly celebrated as a path to wealth. Qingdao Langwang, an investment consulting firm, charges 6,800 yuan for
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 …
To quote the CEO: “We need to dance with the wolves”. Meaning? That “the only way to truly understand China’s stock market is by learning the tactics of traders who routinely manipulate it.”
Bloomberg states that there are “hundreds of books on the subject” of market manipulation and goes on to characterize the prevailing culture:
Instead of avoiding suspected Zhuang Jia targets, many of the nation’s 97 million individual investors actively seek them out — hoping to ride the artificial gains in manipulated shares and sell ahead of they inevitably collapse.
While this piggy-back strategy is “completely legal” in China, the article emphasizes:
Over the past few months, [Chinese regulators have] escalated a crackdown on market manipulators, ensnaring some of the the nation’s most high-profile money managers and announcing more than 2 billion yuan of fines and confiscated gains.
For example, authorities assessed a fine of 19.9 million yuan against one hedge fund manager last September. And in November “police froze $1 billion of shares … tied to” yet another prominent investor.
Here’s the full article.
What I find most alarming regarding Zhuang Jia is the dangerous gap between awareness in China and ignorance in the West. In China, investors discuss pump-and-dump schemes openly, accept them as fraudulent, and consciously inflate bubbles – buying into them, risk and all. As long as they can cash out in time and let somebody else absorb the loss, so be it!
Meanwhile, in the West we’re used to more reliable conditions. So we tend to assume whatever the market does is real. If price increases seem too rapid to justify, we will invent theories to justify them or simply accept market demand on faith. Following all, money is flowing; isn’t that proof enough?
Some months ago, people began to voice doubts. I described “hype” and wondered aloud if recent buyouts would end up resembling unintentional pyramid schemes. Andrew Allemann warned regarding domain pumping and bubbles bursting. He even found a Chinese registry had included bogus auction results in a NamePros post.
Following urging caution where the Chinese domain sector is concerned, some of us have been pilloried and ostracized. That’s understandable. Where such assets are promoted for sale, any mention of hype tends to be met with hostility. But even my tamest comments have been censored or blocked by major sites. So the Bloomberg piece is welcome vindication.
Market manipulation does not explain 100% of the growth we’ve all witnessed in the Chinese domain market during the last year. For my part, I do see legitimate value in the best Chinese-style domains. But enthusiastic pumping – both inside and outside China – accounts for a big part of the lift. With so many people in China engaging in Zhuang Jia, it would be shocking if nobody thought of gaming the system with domains.
Remember, $5 trillion in stock-market value was suddenly erased during the Chinese crash last summer. With the Chinese government cracking down on perpetrators of Zhuang Jia during the fall, where better to hide out and repeat these pump-and-dumps than in our largely unregulated domain industry?
