China Public About Manipulating Its Markets

We are on the midst of can be coined a “new world financial order.” Understanding this might start by examining China’s moves to apparently “intervene” as its stock market was plunging. Placing a bow around this package this morning was the Pulitzer Prize-winning The New York Times Company (NYSE:NYT) columnist James Stewart who made some interesting statements to benchmark history.

Will China’s short-sellers face a public firing squad? Or will punishment take place in private?

As China come off a crackdown on stock market manipulation, as reported earlier in the month, they are now said to be engaging in stock market manipulation of their own. Threats of harsh treatment doled out at the hands of government overlords – publicly reported as potential fines or jail but privately joked about as a firing squad – could befall short sellers.

More at issue than the dramatic is the role China’s government is playing in propping up their stock market. While they publicly float plans for a $20 billion government fund to prop up Chinese issues – Stewart accurately called this “symbolic” and a “drop in the bucket” – the real work is likely to be taken on by the People’s Bank of China. China has no doubt the means in terms of massive capital to “throw at” its equity markets “and possibly the will to do it,” Stewart said, noting that in China views the stock market from a political and not solely a financial perspective. “China is not a democracy,” he said, ignoring the yardstick placed on the stock market by U.S. political leaders and unreported attempts to keep hope alive stateside.

For this activity the Chinese central bankers could be looking to quant wizards whispered to be located at a central bank headquarters in lower Manhattan for guidance, a point Paul Singer touched on in one of his investment letters. But the very concept of a governmental related organizational authority such as the Federal Reserve or anyone else trying to manipulate markets is something to which Stewart does not subscribe.

Stewart expresses outrage at the thought of a government manipulating stocks

“Can you imagine the United States if the government decided to take a huge amount of taxpayer money and throw it at selected stocks on the market?” Stewart said.  “This would never be tolerated.”

Here it is important to examine word choice. Steward said it would generate outrage if a US governmental body threw money at individual stocks, he did not say it would be an outrage if they threw money at, say, broad based stock market derivatives. It is unclear if Stewart is aware of the inside conversation on how high frequency trading and a very different market structure allows those with knowledge to stimulate some of the strings that drive markets tighter and looser. But regardless, he was not a bull on market manipulation, at least over the long duration, another interesting word choice.

“A government cannot move a stock market over the long-term,” he said. “As far as we know it’s never really worked.” He is correct about the “long-term” aspect. There are no known studies of market manipulation in the long term, or no public academic works at least.

Powerful forces drive markets, the more power the more control in the steering

There are, of course, private examples of short term market manipulation triggering medium term trading algorithims which then, if the trend has enough power, are a contributing factor into triggering long term trend following Hedge Funds into action. It can be seen in individual stocks. The managed futures industry championing Tesla when it was in the $50s and then running with the bull until it moved past $200, where many got off the ride, is another example. This is both an algorithmic and fundamental example of trend analysis where markets moved. Another point of such behavior took place after the initial Facebook Inc (NASDAQ:FB) IPO. Options put volume, said to be driven by certain proprietary and fund traders, was credited behind the scenes for moving that market initially lower, raining on “Zuck’s” IPO parade. None of this can be definitively documented as trade data linking trades to fund managers remains private, but the options volume in the case of Facebook and the press reports in the case of Tesla pull back the curtain to a degree.

So yes, among those who pay attention to that which generally isn’t reported, these are but a few of the cases of market influence that certain people inside the U.S. financial services industry watch on a regular basis – and often chuckle about, as the behind the scenes story is typically magnitudes more interesting than mainstream fare.

As we look at China and its moves to play god with the “free” markets, they still have lessons to learn. Mr. Market generally doesn’t like manipulation. Supply and demand is a force of nature, not just an economic concept. And mean reversion events sending stocks lower after magnitude moves of standard deviation higher are commonplace. Hockey stick markets typically give those buying at the top rough treatment might be a message Chinese investors will need to learn.