Utter Manipulation

Chinese shares are up over 5% today.  I didn’t have any positions in any Chinese companies or indexes.  I was short some option premium, so I lost a little there but not too bad.  The Chinese politicos are backslapping themselves.  Of course, they banned anyone from selling any shares of a company they owned 5% of.  They banned short selling.  The Chinese secret police are rounding up people and businesses that went short yesterday.

The Chinese government built the bubble that popped.  It built cities without people, and roads to nowhere.  What’s important to remember is that in a communist society, by definition it operates at full employment.  There are no exceptions.  Friends of mine that lived behind the Iron Curtain would tell me stories of people going to work each day, but sitting around an office smoking cigarettes and doing basically nothing.  Yet, they were paid because that was their job.

Here are some of the measures the Chinese government and the PBOC have used in the past couple of weeks to prop up the market:

• a ban on major shareholders, corporate executives, directors from selling stock for 6 months
• freezing more than half (1400 at last count per Bloomberg) of the listed companies from trading,
• blocking fund redemptions, forcing companies to invest in the market,
• halting IPOs,
• reducing equity transaction fees,
• providing daily bailouts to the margin lending authority,
• reducing margin requirements,
• boosting buybacks

That’s not a market.

Ironically, a lot of the Bitcoin trading is done in China.  I don’t trust those markets either for a variety of technical and functional reasons.  Add the fact that they are traded in China to the list.

Over the course of the Chinese expansion, people would give me dirty looks when I said the Chinese were still communists and hadn’t embraced capitalism.  They’d tell me, “It’s not what you think.  It’s different.”  Sorry, the way they dealt with a market melt down is exhibit A that it’s the same.

Their borders aren’t open.  It’s a highly protected economy.  Even companies like Google can’t break through.  If you are a foreign company looking to do business there, you have to work the system.  Capitalistic markets have creative destruction embedded in them.  Sometimes they rally, and sometimes they break.  As we have all seen, they can break hard.

Governments role when a market breaks hard is to pursue an easier monetary policy.  That’s about it.  Let supply and demand forces sort things out.  If you have confidence in your system, then things will get better.  Well functioning markets are not puppets where you pull strings to make things happen.  They are the most efficient allocators of capital that exist.  Sometimes they are messy.  Sometimes they do things we would rather not see them do.  But, markets always know best.

Never trust a Chinese balance sheet.  Never trust a Chinese income statement.  I wouldn’t have money in Chinese stocks.  If I was a wealthy Chinese person, I’d be figuring out ways to get my capital out of the country.  The only winner will be the Chinese government.

We can read the numbers, and listen to the talk.  But, will the Chinese market ever have credibility as a real market again?