Tuesday, June 05, 2018

Let the Seller Beware

Accounting irregularities and insider manipulation--much more prevalent in China than America--would seem to make the Hong Kong stock market ripe for short selling. However, betting that a Chinese stock will go down is an especially risky proposition: [bold added]
Sly humor:  junks in Hong Kong (WSJ photo)
Hong Kong’s market structure has made life difficult for the short sellers. The presence of large controlling shareholders in many listed Chinese firms makes it is easier for friendly parties to defend them against short sellers’ attacks. Dali Foods, for example, has only a 15% public float.

Another difficulty is the growing influence of money flooding into Hong Kong from mainland China to defend beleaguered stocks.
The WSJ calls moves to prop up questionable securities as "threats to the Hong Kong market’s integrity." But such indignation merits attention if integrity is a bedrock principle; it's not, but State Capitalism is. Wrote the Economist in 2012:
state capitalism...tries to meld the powers of the state with the powers of capitalism. It depends on government to pick winners and promote economic growth. But it also uses capitalist tools such as listing state-owned companies on the stockmarket and embracing globalisation....

State capitalism can claim the world's most successful big economy for its camp. Over the past 30 years China's GDP has grown at an average rate of 9.5% a year and its international trade by 18% in volume terms
Hong Kong market participants have been amply warned. They should adjust their predictions to account for the Chinese government's direct and indirect support of stocks. Let the (short) seller beware.

Note: U.S. markets aren't exactly free of government interference. For decades there has been a strong belief in the "Fed put", that the U.S. Federal Reserve would be a buyer of last resort if equities collapsed, or at least infuse the economy with cash so that private investors would prop up prices.

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