Cracked

We”ll we’ve seen and aren’t too sure what we are looking at. Immediately after announcing new regulations to close loopholes in 2006 securities transaction rules, (see Stock Sheriff Swaggers) the regulators have announced their first exemplary fine on a retail investor.

Zhou Jianming has been fined 1.8 million yuan ($245 million) and a similar amount said to be his illegal profit confiscated. Zhou was accused of ramping the share price of Datong Coal Industry and 14 other companies between June and November last year. He did this in Datong Coal’s case by raising his bid from 10.22 a share to 10.59 a share 61 times in course of an hour during which he bid for 40 million shares, according to Shanghai Daily.

The China Securities Regulatory Commission says this was done to mislead other investors and bloat the share price. Given the Wild West ways of the Shanghai market, this seems like crushing a nut with a sledge hammer while leaving the rock nearby untouched.

Shanghai Bears

The Shanghai and Shenzhen stock markets are now approaching a level 20% below their peak in mid-October. Such a fall in a year is the rule of thumb for a market in a developed country to be called a bear market. Yet share prices on the Shenzhen exchange are still more than double and those in Shanghai more than four-fifths again higher than they were a year ago.

This is a flow of money bubble — just like Japan’s stock bubble in the 1980s and America’s in the 1990s. Stocks offer a better return than alternatives, which in China, like Japan at the time, are few in number, and so people are borrowing to invest speculatively on the basis that they will be able to get out in time. Full speed ahead and damn the risk.

The smarter fool theory rarely works. When the flow of money gets cut off — for whatever reason: government policy, some exogenous event, an unexpected shock — it drains away rapidly. Stock prices fall quickly and many investors — usually individuals who can least afford it — get left stranded high and dry.