Guest Post: Was The Chinese Government Behind The Stock Rally?

Tyler Durden's picture

Submitted by Yong Liu

Was The Chinese Government Behind the Stock Rally?

Measured by the Shanghai Stock Exchange Index, the Chinese stock market advanced 12% in 10 trading days in October 2010. While investors big and small are celebrating their returns in a market where shorting stock is not allowed, a bigger topic emerges: how did it happen? Increasingly, people point their fingers to the direction of Beijing.

Green Shoes

People still remember the previous bull market. It started on July 19. But the seed of the bullishness was planted the previous Thursday when China Agriculture Bank struggled with its IPO. For two days, the Shanghai index stuck at 2424 level. Mysteriously, the index advanced 2.1% the next Monday. By the end of the week, the index was at 2572 level.

During this time, Chinese media reported that American asset managers including Capital Research & Management and Morgan Stanley made hundreds of million profit through Agriculture Band H Shares in HongKong. In Shanghai, big insurance, central government asset managers and hedge funds also leaked information that they were actively buying the bank stock.

Zhang Yunzheng, president of Agriculture bank came out to disclose a green shoes mechanism and attributed the success of the IPO to this mechanism. However, Zhang was not clear about the nature and details of the mechanism. People were left wondering with a number of questions: Is this mechanism a government project to manipulate the market? Or is this a public private joint venture to achieve this purpose? If so, how a private investor can participate? Who are allowed and not allowed to participate? Is the green shoes short term in nature or permanent?

Like stock markets everywhere else in the world, the market voted with great excitement before any question was answered. A bull market was formed. The week ended up 6.1% for the week . For retail investors, the signal was a break out of 60 day moving average. Remember the 60 day moving average, it was a consistent message for the cycle.

By early August, the market reached a 2 month high and repeatedly tested 2670 level with large volume. Volatility was high during mid August. Winks and nods were abound in the market that green shoes was finished. Bulls were not convinced, the market was headed to 2700 level.

No official came out to declare the end of the green shoes. By mid September, only fools rush in because the market fell through the 60 day moving average. On September 16, Agriculture bank was traded below the IPO price with heavy volume.

Non Circulating Shares

With Agriculture bank story forgotten almost immediately (just like any other stock market), the market was starting to worry about a number of things. Top among them is an incoming flood of expiration of non circulating shares.

I don't know anyone who is happy about non circulating shares. Nor do I know anyone who knows anyone who is excited about it. For most investors, non circulating shares bring fear and sadness.

Non circulating shares are stocks allocated to an exclusive group of people or institutions. The shares are priced like option except it is a deep in the money option for the price of a deep out of money option. It is called non circulating because holders cannot exercise it before expiration. When expiration day comes, investor shares are diluted like a soup for obvious reason. The first wave of expiration came when the Shanghai index was above 5000 level. The market was still struggle below 2700 at the end of September 2010.

Chinese media report a new wave of expiration. The volume number for September was 105 billion. More to come in ensuing months.

This Time Is Different

If you (like me) think the market would correct in October because of the giant negativity, you ain't learned nothing for your years of studying!
Only it is not just you and me. Chinese stock market started trading on October 8 after a week of national holiday. The trading day was closed at 3.1% rally. Most people were scratching their heads for an answer.

Someone quoted Wind data for a proof: between September 30 and October 18, 223 of 394 mutual funds were decreasing or flat their holdings. They missed a 446 points rally. News media was heavy on QE II. It sounds like a super cruise line with a lot of fun for stock markets
all over the world. Only the articles were filled with things like printing money.

Why news like U.S. print a lot of money is bullish for Chinese stock market is beyond me. After all, the backbone of the market is ma and pa retail investors throughout the country.

But stock market has a common gene. When American investors cannot deal with their negativity, they theorize Uncle Ben (Uncle Ben already had a lot to offer before anyone asked). In China, we also theorize someone. And that has to be Beijing. Again, no details (no one came out to disclose anything).

A lot of questions unanswered. The market always buys first and asks later. Maybe next time the stock market advances, we will ask the same question again: Is The Chinese Government Behind the Stock Rally?

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HedgeAccordingly's picture

Of course it wasnt me behind the rally. 

Goldtoothchimp09's picture

dollar getting hammered

it really is a joke -- it's all funny money games now. Just print up a trillion more Bernank bucks -- give em to the banks so they can leverage it into the "markets" so we can bankrupt the middle class thru staples inflation. Solid plan!!

slewie the pi-rat's picture

the EU has decided to sacrifice sanity for the sake of the euro.  how bullish!

Lmo Mutton's picture

Report only approved messages about the rally.

AUD's picture

All governments are behind all stockmarket rallies. It is the central bank that inflates the 'money' market.

slewie the pi-rat's picture

green shoes or PPT, take your pick

  • free tibet
  • free zHedge
  • free slewie
Doyle Hargraves's picture

Free dumb


I mean freedom bitches (US-A US-A sarc heavily on)

42 is the answer's picture

US$ is getting hammered right now.

Id fight Gandhi's picture

Any every time the dollar falls, everyone wants more dollars driving domestic prices of everything up.

Why doesn't anyone in the government see this??

My measure of the dollar is in relation of gold price. It's not tradition. Gold has been the gold standard. So gold "rose" (dollar fell) a tremendous amount just in a couple years. Going from 900oz to over 1600oz is crushing drop in dollars.

Make matters worse, employers justify playing employees even less than 4 years ago. Workers get less money that's worth less.

Does anyone care??!

Caviar Emptor's picture

Why news like U.S. print a lot of money is bullish for Chinese stock market is beyond me. After all, the backbone of the market is ma and pa retail investors throughout the country

When the US prints money, it signals "Ponzi on". It signals that the US Fed is going to put money into hands that will a) represent hot money to invest in paper assets of all kinds all over the globe, including and very prominently in China and b) may ultimately keep the US consumer afloat through the "wealth effect" (at least in theory). 

But most importantly, it signals that the US and Chinese governments are each upholding their bargain to divert US manufcturing to China in return for export of goods at lower prices, paid for with sterilized US dollars that are re-cycled into US Treasuries. 

If the Fed announced an austerity plan then the Ponzi would collapse and Chimerica would not survive


Id fight Gandhi's picture

Guess it's time to go LONG wheelbarrows to carry all the worthless dollars. You might need to buy bread.

Obama will make millionaires out of everyone!

darkstar7646's picture

The PPT has had it's coffers raided to keep the government going.

It's China.

HelluvaEngineer's picture

Nah, think it's just been outsourced to algos running on Chinese servers.

These arrows are huge.

Yen Cross's picture

 Is this being printed? I'm a monkey, and I have a Jet to catch....  Slewie you kick ass. Singapore


    Otool is an ass clown, Boner (sp) needs to read [the trutH]  I'm out at ZULU 42...

slewie the pi-rat's picture


safe journey!  enjoy the photo opZ!

AldousHuxley's picture

Pirates and Emperors (from SchoolHouse Rock makers of How a Bill becomes a law)

akenathon's picture

it's simply that QE3 now it's in full swing...

Now everybody understands that in Washington and in Bruxelles there are only a bunch of persons that are only able to create money out of nothing and you'll better off with equities (and gold & silver) than overvalued bonds or cash.

Now the gold & silver super spike comes

Deepskyy's picture

Off topic but it seems India is trying to keep their inflation from hitting double digits with a fairly big jump in interest rates.

50 bps all at once.  Ouch.


SloMoe's picture
"Was The Chinese Government Behind The Stock Rally?"


Rhetorical question, right?

blunderdog's picture

Gotta get me some of those green shoes.  Be stylin.

Jendrzejczyk's picture


Bottom left, near the reply button would be nice.

kaliyuga's picture

May in know from the seniors here where do I get the info for the mentioned 105BILLION of shares that gonna get unlock??? Any idea? Tried Googling around but to no avail.

max2205's picture

China is a bag of suck

buzzsaw99's picture

Why news like U.S. print a lot of money is bullish for Chinese stock market is beyond me...


I hope this is an error in translation because otherwise the author is clueless.

Smiddywesson's picture

China is a bag of suck

An important point is that in any Ponzi, everything crashes together.  I am tired of the talking heads on TV discussing the prospects of this or that country, or the profit potential of particular industries.  All the lifeboats are tied together.  China, Europe, and the USA are not escaping this whirling vortex when it collapses.

thefedisscam's picture

What is the big deal if the Chinese gov. is indeed behind the rally? Why the U.S. Gov. can use the U.S. Fed to push the U.S. stock market up to the sky, while the Chinese cannot?LOL

And, from what I heard, YES, the Chinese gov. and big SOEs are behind the stock rally, just to fence off ALL the foreign shorters. Good luck on those attackers. Soros fate after his attack on HK market during Asian currency crisis will the the fate those attackers.

walküre's picture

How can it be?

TRE Sino Forest rallying on nothingness in a financial climate of despair and default.

Maybe the stock is hot because Ben will need alot of trees to print his funny money?

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