“It is a little excessive to call the shorting of China a ’conspiracy’, but it is a big game of chess.”
Dictated by Fan Vao (Founder and CEO of China Renaissance)
Compiled by Jianqiang Liu, The Founder magazine(ww.iheima.com)
I think the biggest thing behind the shorting of so many Chinese concept stocks is that international capital is shorting China.
China's economy is facing great challenges as well as structural rather than cyclical crisis. If there is actually nothing negative, there are no facts, rumors alone cannot support a short-selling attack. Short-sellers operate in this way: if you should actually be down 10 cents, they scare others into taking you down 50 cents. This is the same as inflating a bubble. You should only be up 10 cents, but they say you should be up 50 cents.
How can those shorting China make the most money? Certainly by shorting the largest and most liquid companies -- China's financial stocks and the Hang Seng Index. These two are elephants. In comparison, short-sellers are no more than small dogs. How can they take down an elephant? By getting others to believe them. As long as everyone is panicking, others will jump in after the smallest of dogs takes the first bite.
How do you make others believe you? First you find a few soft persimmons that can't hold up to a pinch. Among backdoor listings of Chinese companies in America, bad companies make up a large proportion. Muddy Waters and Citron have attacked one after another accurately over the last few years, so the market thinks anything they say is plausible. Then you find some larger companies, such as Longtop Financial Technologies, that indeed have problems. Then you go after companies like New Oriental and Focus Media, which at most have some small issues. Unfortunately for those companies, people have already begun to believe you. The next step is financial stocks and the Hang Seng Index. The Hang Seng Index has returned to 20,000 points, so there is a lot of room below. For short-sellers, the Chinese stocks that have been shorted so far are only side dishes. Shorting them won't return much money.
When your stock price is overvalued, it is necessary to recognize the risk of being shorted. Many entrepreneurs in China continue to think their stock is undervalued after listing and are unwilling to sell shares. They like to pledge stock to borrow money to do other projects. This manufactures an opportunity for short sellers because they can borrow the shares necessary to short the stock.
Once your company is shorted, the battle you need to fight is one of public relations. Of course, the best response would be to find a so-called "white knight," a large fund, to purchase your shares and force the share price upward. Or, simply withdraw from the market. Delisting will make it so the share price cannot go down, and the efforts of short-sellers may be fruitless.
What is pushing the wave of short selling is a batch of large international hedge funds. Muddy Waters and Citron are only their megaphones because hedge funds cannot come out on their own. The key is that these hedge funds were previously shareholders of many of these shorted companies and know their flaws. By shorting them, they can make a little more money. Shorter-sellers often have insiders in these companies to help them gather information.
Behind this is a great industry chain operation. Don't criticize short selling from a moral perspective. Everyone is doing it to make money. It is a little excessive to call the shorting of China a "conspiracy," but it is a big game of chess. The thinking of short sellers is that after puncturing financial stocks and the Hang Seng Index, the Chinese government will step in to rescue the market and they will turn around and take long positions.
This is a game: a game of capital. If you don't understand the rules of the game you will be slaughtered. If China's financial system is not reformed, it will be unable to produce a group of financial elite, and no one will be able to help counter these people.