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By Root 1248 0

the contemporary Chinese capital markets, this flower of evil called zhuang-jia arose as a result of the system. Sickly state-owned enterprises that had to be “released from their problems” by going public were the first factor allowing zhuang-jia to exist. Shortly after these enterpriseswentpublic, their finances quickly deteriorated, the money evaporated, and they fell on hard times again. Thus, people started referring to them as “shells” for sourcing capital. A second systemic cause for the existence of these speculators was the dual nature of the Chinese stock market in its earlyyears.

Whenthemarketwas established, due to the “defectsinsystemsdesign,”

Zhuang-jia

Little

Shareholder

Stock

Market

The Shanghai Stock Exchange has been dubbed a “gambling den.” Zhuang-jias manipulate the market behind the scene while millions of little shareholders fall victims.

a strange situation existed that allowed two different classes of shares to be issued. One could be traded and the other could not. Generally, around twothirds of the shares could not be traded, so that these non-traded shares held a controlling position. Traded and non-traded shares therefore had different amounts of power: The power of non-traded shares could be used to manipulate the market for traded shares. Meanwhile, the governance structure of listed companies was extremely “deficient.” It was very easy to have a “dominant shareholder” and even an “autocratic shareholder.” The existence of non-traded shares allowed zhuang-jias, in alliance with the key shareholders or as the key shareholders themselves, to use extremely cheap and “grey” measures to control a company. The immature regulatory mechanisms meant no way to prevent stock price manipulation.

For a long time, the most popular expression in the Chinese stock market was ti-cai, which means subject matter. All one had to do to be successful was dream up rumors, scares, and false information, and be brave enough to undertake all the tricks.

Zhuang-jia had the following characteristics. First, they were all exceptionally good at concocting stories. Among a widely dispersed group of shareholders not privy to real information, the little shareholders were like lambs to the slaughter. Because of the extreme information asymmetry, the zhuang-jias often hid in the background, behind the scenes, from where they threw out scraps of eye-opening “material.” In this, the media played

One of the “Ten Great Engineering Projects” in the western part of China successfully cut off the flow of water at Zipingpu, to create a catchment basin. The Wenchuan earthquake of May 12, 2008, occurred in this region of Sichuan.

a complicit role. Often paid for their services, the journalists were able to weave fabulous stories around certain shares and to fabricate miracles on behalf of the speculators. Further, the zhuang-jias were highly talented in using capital to their advantage. In their opinion, the stock market was the most profitable place in the world. They used “shell capital sources” that had a name but no substance to serve as buyers, as well as legal-person non-traded shares of state-owned enterprises that were already listed. This chicanery allowed them to buy in at a cheap price, and in a short period, create an empire that did more in managing finances than in managing any real business.

One former zhuang-jia will serve as a case in point. At his height, he controlled the shares of three companies, all of which appreciated by ten times in the space of five years. The profit that he personally derived from his position as zhuang-jia came to several billion renminbi. Meanwhile, the three companies under his banner did rather poorly. The total net profits amounted to only some RMB 240 million, far below the miraculous results that one might have expected given the price of the shares. In order to keep the share prices up, he constantly engaged in capital-market activities, either by buying other companies or declaring that he was doing so.

He would use the combined earnings to exaggerate corporate results,