Chinese Stocks Surge Further, But Insider Manipulation and 'Large Sharks' Cast Doubt on a True Bull Market

Chinese Stock Market Surges, But Questions Remain Over Long-Term Bull Market

The Chinese stock market experienced a remarkable rally, closing out the last day of September with a wave of investor optimism. Major indices saw significant gains, daily trading volume hit record highs, and the market's overall performance has reignited discussions on the potential for a lasting bull market. However, despite these positive signs, experts caution that it may take time to confirm whether this is the start of a sustainable upward trend or just a temporary surge, especially as major institutional players, or "large sharks," have yet to make decisive moves.

Chinese Stock Market Rallies on Investor Optimism

On September 30, 2024, the Chinese stock market (A股) witnessed a continued rally, with key indices opening high and maintaining an upward trajectory throughout the day. The Shanghai Composite Index surged over 8%, closing at 3,336.50 points. More than 5,300 stocks across the Shanghai, Shenzhen, and Beijing exchanges saw gains, marking a broad-based rise. Trading volume exceeded a historic 25 trillion yuan, breaking previous records and underscoring heightened market activity.

In particular, indices like the Beijing 50, STAR 50, and ChiNext all posted double-digit gains. The Beijing 50 index surged more than 22%, setting a new single-day record. Leading sectors included beauty care, computer technology, and electronics, while non-bank financial stocks also continued to perform strongly. Major securities firms like Tianfeng Securities, Guohai Securities, and CITIC Securities all hit the daily limit.

Hong Kong’s market followed suit, with the Hang Seng Index and Hang Seng Tech Index both surging over 8% by the afternoon, reaching new yearly highs. Tech stocks and new energy vehicle companies led the charge, with Alibaba Health rising over 30% and NIO jumping more than 20%. Chinese brokers listed in Hong Kong, such as Shenwan Hongyuan and Industrial Securities, also saw major gains, with Shenwan Hongyuan skyrocketing 107%.

Government Policy Support Fuels Optimism

Analysts attribute much of this market optimism to recent government policy measures aimed at supporting economic recovery. Key fiscal and monetary adjustments, such as easing real estate policies and improving liquidity, have boosted investor confidence. These moves are part of broader efforts to stimulate domestic demand, restore market confidence, and ensure steady economic growth in 2024 and beyond.

Major securities firms like CITIC Securities and Dongwu Securities highlight the government’s proactive stance as crucial in maintaining market momentum. The relaxed real estate policies, combined with efforts to revitalize growth sectors like AI, semiconductors, and healthcare, have positioned these industries as leaders for future market performance.

Foreign Investors Return, But Concerns Remain

Foreign capital inflows have also contributed to the stock market rally. Stabilization of the renminbi and China’s improving macroeconomic conditions have attracted renewed interest from international investors. This renewed participation is seen as a positive signal for the market’s future performance, though caution remains due to persistent risks, including global economic uncertainties and geopolitical tensions.

Some sectors, particularly non-bank financials, technology, and consumer goods—especially liquor stocks—have stood out as major winners. The technology sector, encompassing artificial intelligence (AI), semiconductors, and digital economy companies, continues to benefit from favorable policies and advancements, making it a key area for future investments.

Lingering Long-Term Challenges

Despite the positive outlook, significant long-term risks remain for China’s economy and stock market. Concerns about government intervention, corporate debt, and financial instability could hinder sustainable growth. The government’s issuance of "new money" through monetary easing and support for state-owned enterprises (SOEs) has sparked fears about the creation of "zombie enterprises"—companies that survive solely on government aid but do not contribute to economic productivity.

Additionally, rising corporate debt poses a significant risk to financial stability. The heavy issuance of new credit to state-owned entities, particularly in the real estate and construction sectors, has led to inflated corporate leverage, heightening the risk of defaults. This, in turn, could crowd out private companies, further complicating the road to economic recovery.

Declining Foreign Confidence Amid Economic Uncertainty

While the stock market surge has attracted some foreign capital, many global investors remain cautious. Geopolitical risks, particularly ongoing tensions between China and the United States, have prompted many foreign institutions to reduce their exposure to Chinese assets. Additionally, regulatory uncertainty, particularly in sectors like technology, real estate, and education, continues to weigh heavily on investor sentiment.

Foreign capital outflows are another concern, driven by apprehensions over growth sustainability and market volatility. As the U.S. Federal Reserve maintains tight monetary policy, higher interest rates globally have made Chinese equities less attractive relative to safer investments in developed markets. This has led some hedge funds and asset managers to shift focus to other emerging markets or back to developed economies for better returns.

Risks of Market Manipulation and "Large Sharks"

One of the most concerning risks currently facing the Chinese stock market is the potential manipulation by major shareholders and corporate insiders, colloquially referred to as "large sharks." These individuals and entities often hold significant influence over the stocks of their companies and are suspected of artificially inflating share prices for personal gain. In particular, some insiders are believed to be using China's loose credit environment to secure cheap loans by pledging inflated stocks as collateral. This practice, while legal, poses serious risks to both lenders and retail investors.

Stock Pledging and Its Risks: Stock pledging has become a common practice in China, where company executives pledge their shares to obtain loans. The problem arises when these insiders engage in activities that artificially boost their company's stock prices. By inflating valuations, they can secure larger loans against what appears to be higher-value collateral. If the stock price falls, however, it can lead to a domino effect: loan defaults, forced share sell-offs, and ultimately significant financial instability for both the companies and their lenders.

Pump-and-Dump Schemes: Another alarming trend is the possibility of pump-and-dump schemes, where insiders drive up the price of stocks through strategic announcements or trading activity, only to sell their holdings at the peak. This leaves retail investors—who are often unaware of these manipulative tactics—holding overvalued stocks, which subsequently plummet in price. As a result, regular investors may face significant losses, and the market could experience heightened volatility.

Capital Flight: There is also increasing evidence that some insiders may be moving capital overseas after obtaining loans against inflated stock prices. This type of capital flight is a worrying sign for the domestic economy, as it not only reduces liquidity within China but also signals a lack of confidence in the local market’s long-term stability. Despite regulatory efforts to curb such practices, loopholes in corporate and financial governance allow some insiders to exploit the system, potentially undermining the integrity of the stock market.

The overall impact of these actions can be devastating for market stability. Retail investors, who form a substantial portion of the trading base, are often the last to react to manipulative behavior. As stocks crash after being offloaded by insiders, market trust erodes, leading to long-term consequences for investor confidence and market health.

Time Will Tell: Is This a Real Bull Market?

Although the recent rally in Chinese stocks has been impressive, analysts are cautious about labeling it as the start of a long-term bull market. Several factors need to be considered before such a conclusion can be drawn, with both external and internal risks looming large.

Economic Fundamentals: One of the key determinants of whether this is a sustainable bull market is the underlying health of China's economy. While the stock market has surged due to government stimulus, the real test will be the recovery of key sectors like real estate, manufacturing, and consumer goods. These areas remain fragile, with many companies still grappling with high debt levels, sluggish demand, and geopolitical pressures. For the bull market to be sustainable, there needs to be consistent corporate earnings growth and a stronger recovery in consumer confidence.

Insider Behavior: As mentioned, the actions of major shareholders and insiders will play a critical role in determining the market’s future. If these "large sharks" continue to manipulate stock prices for short-term gains, it could undermine any chance of a stable, long-term market rally. Analysts are closely monitoring whether these key players will begin selling off shares or taking advantage of the inflated market conditions to obtain more favorable loan terms. Their behavior in the coming months will offer a clearer picture of whether the rally is driven by genuine market optimism or speculative manipulation.

Foreign Investor Sentiment: Another crucial factor is the sentiment of foreign investors, who have been slow to return despite the recent rally. Many global investors remain wary of China’s regulatory environment, ongoing geopolitical tensions, and the fragility of its economic recovery. If foreign capital continues to flow into Chinese equities, it could support the market’s long-term growth. However, if global investors pull back due to concerns over volatility or economic slowdown, the market could face significant headwinds.

Geopolitical and External Risks: Beyond the domestic market, external risks such as U.S. interest rate hikes, global inflationary pressures, and geopolitical tensions with key trading partners like the United States add further uncertainty. These factors could weigh heavily on investor confidence and market performance, potentially derailing any long-term bull market trajectory.

In conclusion, while the Chinese stock market has experienced a notable surge, it is too early to declare this as the start of a lasting bull market. Investors should remain vigilant, keeping a close eye on insider behavior, economic fundamentals, and external risks. The market may be at a crucial inflection point, but only time will reveal whether the rally is sustainable or just a short-lived boost driven by speculative forces.