China: GameStop Saga Demonstrates the Failure of Free Markets

An investor looks at screens showing stock market movements at a securities company in Nanjing in China's eastern Jiangsu province on July 6, 2020. - Shanghai stocks surged on July 6 to a more than two-year high as investors piled in following a combination of rosy predictions for the market …
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China’s state-run Global Times on Sunday celebrated the GameStop stock-shorting saga as a failure of free market capitalism, boasting that such a wild ride could never be taken in China’s tightly-controlled financial system.

As far as the Chinese Communist paper was concerned, the GameStop stock market revolt was merely an extension of the January 6 riot on Capitol Hill, with both events “exemplifying a fragmented democracy.”

Chinese analyst Wu Jinduo of Great Wall Securities said America’s loose monetary policies and clumsy pandemic stimulus efforts set the stage for the GameStop revolt, which looks like a victory for the retail investors, unlike the outcome on Capitol Hill:

As part of moves to revive the pandemic-plagued US economy, the Fed slashed interest rates to zero and implemented unlimited quantitative easing, and as a result, US stocks stabilized since the second quarter of last year. But it is Wall Street that has benefited the most from the Fed’s easing and ultimately inspired antagonism among retail investors toward Wall Street, Wu told the Global Times on Sunday.

The monetary easing plus commission-free online brokers such as Robinhood have made stock investment increasingly accessible to average Americans, she believes. 

The US coronavirus stimulus package that included direct cash payments to low- and middle-income Americans, intended to pull the US economy out of recession, actually sowed the seeds of chaos in its equity market, experts said, with many individuals using the money to trade stocks.

In contrast, the tightly controlled Chinese economy “ended 2020 with a 2.3-percent expansion, setting itself apart from many countries and regions that relied on money printing to reinvigorate their economies.”

The Global Times went on to extol the virtues of China’s pandemic rebound at length, implicitly chastising the U.S. for leaving its stock market vulnerable to the GameStop barbarians by bungling its response to the Wuhan coronavirus, creating a huge pandemic underclass seething with resentment at large institutions, and then giving them lumps of stimulus money they could forge into swords on Reddit instead of the plowshares envisioned by the U.S. government.

“The ‘revolution’ waged by U.S. retail investors in defiance of institutional traders points to consensus-breaking that initially began in the political and socioeconomic arenas and has now extended into the capital market,” the Global Times asserted, citing senior research fellow Dong Shaopeng of the Chongyang Institute for Financial Studies at Renmin University.

Here in the United States, the GameStop saga prompted a good deal of discussion about just how “free” the market really is. 

Former Wall Street bond trader Chris Arnade told the Intelligencer on Friday the Reddit-fueled squeeze of GameStop stock is exactly what hedge funds do all the time, right down to the issues of collusion and market-rigging; the only difference is that the big guys use high-powered international conferences and mainstream media to devise and execute their strategies, not freewheeling Reddit forums:

So, you go to Davos, go to dinner at investment conferences, and use all the knowledge you gather from these conversations with government officials and other investors to put on a trade. And you execute that trade in a way that gets you the most bang for your buck by exploiting complex financial products and what we call “technicalities” in the market: the way other people are positioned, the holdings people have. Then you go on CNBC, send out morning newsletters, send out direct messages via Bloomberg to your friends, and sell everyone on your trade.

That’s applauded behavior on Wall Street. You’re outsmarting the room, and you’re telling people that you’re outsmarting the room. In many ways, that’s what happened on Reddit over the course of the last six months. But it wasn’t done by one firm; it was done by 2.3 million self-described degenerates.

“I wish the hedge funds would stop doing what they’re doing. But if it’s legal for the hedge funds, you can understand why people on Reddit would be outraged when people act like it’s not legal for them to do the same,” Arnade sighed, arguing that the “hypocrisy” of that approach is the real problem, and the source of the rebellious attitude the Global Times diagnosed as an inherent flaw in free-market capitalism.

“It’s ultimately self-defeating because everything you do to try to stop these people, it’s only going to make them more cynical and more convinced that the system is rigged and, consequently, more prone to doing things that are just fun. Stuff that the elites view as disruptive. When the system is so blatantly unfair, people are going to get madder and madder,” he warned.

This analysis agrees with the Chinese Communist critique in some ways, but inverts its most crucial element, because China’s system of “managed markets” is even more hypocritical and slanted in favor of the power elite than Wall Street’s hedge funds. Beijing pretends to be deeply concerned about China’s endemic “corruption” but investigates and prosecutes it very selectively, depending on the health of the relationship between those accused of corruption and the Communist Party elite.

The Global Times is not the first to draw comparisons between the GameStop retail traders and the January 6 rioters. Indeed, they might very well have picked up the comparison from reading U.S. media. As John Carney of Breitbart News noted on Friday, many pro-establishment commentators looked at the GameStop traders and saw nothing but “Trumpists” or Capitol Hill hooligans with Robinhood accounts:

On CNBC, former SEC Commissioner and board member of CIT Laura Unger, said the surge in GameStop and others creates questions “about the integrity of the market.” She then went on to liken people profiting from the trades to rioters at the U.S. Capitol.

“Everyone is scratching their heads over this. What should happen? What is the right thing we can do to control it or stop it? Not unlike what we saw on January 6th at the U.S. capitol,” Unger said.

Billionaire hedge fund manager Leon Cooperman, who has said he voted for Joe Biden based on his values, blasted GameStop traders.

“The reason the market is doing what it’s doing is, people are sitting at home, getting their checks from the government, basically trading for no commissions and no interest rates,” he said.

The Chinese Communist Party (CCP) certainly would not allow some unruly band of retail investors to give Party-controlled big investors a humiliating defeat on the stock market or drive their funds to the edge of insolvency. The challenge facing America after the GameStop debacle is whether to become freer in response, or crack down to protect the privileges of the biggest players with the best political connections, and thus become more like China.

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