China is a beautiful country, mystic, ancient, overwhelming. But as captivating the culture is, the regulatory systems and accounting standards surrounding its financial markets are opaque, euphemistically put.
Publicly listed equities can halve in value overnight due to devastating government intervention (cases in point: TAL Education and New Oriental Education and Technology) or creative accounting practices (remember Luckin Coffee?)
I had traded in Chinese equities for a while back in the day, but have ceased doing so long ago. Pure fear keeps me and many other speculators out, fear of waking up to a situation where I find a big hole in my wallet. Sure, one can mitigate with careful position sizing, but why take the risk in the first place?
Unless you have a habit of buying no-earnings no-sales biotech lab stock and generally know how to manage positions and risk, such blowups are unlikely and less damaging in the well-regulated western capitalist markets.
Last week, politics has once again entered the Chinese equity markets. Two US-listed online brokerage platforms Futu and Up Fintech Holdings (FUTU, TIGR), providing similar services to Robinhood, sold off more than 30% overnight on renewed fears that authorities might not be done up-ending the market.
Painful, but “small” damage compared to previous times regulators had intervened in the stock market.
There are two lessons to be learned here:
1 – Don’t speculate in markets that are prone to significant point intervention by governments and ruling parties.
Of course, any market is prone to some and even quite significant intervention by public entities (I’ll throw you a curveball: central banks!), but point interventions should be an extreme phenomenon and not the rule. Ant Group’s IPO in 2020 serves as a chilling memorial to the crushing power of state point intervention in markets.
2 – Don’t own something that is trending down for weeks and months, or has heavy overhead supply.
Just don’t. Don’t buy the dip, don’t average down, don’t buy on low valuation. Events such as these tend to happen in downtrends. Those commonly referred to as ‘the smart money’ had likely expected or known the impending issues before they occurred through their vast research resources and connections. They were out long before, their selling and lack of buying support causing the downtrend. And even in a renewing intermediate-term uptrend, trapped buyers at higher prices will exacerbate any reactions to the news. I can teach you these concepts and how to follow the smart money here.
FUTU had started to trend up with the slowly recovering Chinese equity markets over the last few months, but even at the recent High point it had >66% supply dangling over its head and was in a long-term downtrend.
Luckin Coffee (now OTC: LKNCY) had shed 58% off its price by the time the news broke. No one should have been stuck in this.
TAL and EDU had been trending down more than 5 months and lost 80% and 71%, respectively, before the massive 70% and 55% gap-downs occurred on the news.
Ignore these lessons at your own peril.
