Chapter Thirty-Four: Is New Hot Money Entering the Market?

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Chan City, China.

Chan City was the third-largest city in eastern Guangdong, neighboring the provincial capital of Yang City. As one of the principal birthplaces of Southern martial arts, it still preserved a great many martial arts schools and was known as the “City of Martial Arts.”

Wing Chun, as well as the universally renowned grandmaster Ip Man, both originated in Chan City.

At that moment, inside a two-story duplex villa in the central district of Chan City, hot-money trader Liao Guopei, known as the “Shadowless Kick of Chan City,” was caught in a fierce internal struggle. He very much wanted to push the stock to another daily limit-up, but the funds in his hands were no longer sufficient to support one.

The departure of Chen Sanrong, nicknamed “Jump-Off-the-Building Brother,” had been like the first domino falling. The other hot-money traders were now scrambling to exit and realize their gains, leaving very limited buying support for Changan Automobile.

Watching the deceptive bullish order book during the opening call auction, Liao Guopei could only choose to follow suit.

Between 9:22 and 9:25, at least ten thousand retail investors had poured in with their money, chasing the rising price and absorbing a considerable amount of selling pressure.

With the market about to open, Liao Guopei stopped hesitating. Since the other hot-money traders intended to withdraw, he had no choice but to retreat with them.

When the market opened at 9:30, expectations surrounding the central bank’s first-quarter monetary policy meeting drove the banking, insurance, and infrastructure sectors to surge together. The broader market rose by 1.2 percent, pulling up numerous other stocks as well.

When the broader market was stable, it was the perfect time to unload shares gradually.

Chen Sanrong, Liao Guopei, and the other hot-money traders had already begun liquidating their positions step by step. The buy orders sealing Changan Automobile at its upper limit had fallen from 1.3 million lots in previous days to 400,000 lots, while the selling pressure was visibly increasing.

After selling nearly half his position and making a net profit of 2.1 million yuan, Liao Guopei sensed that something was wrong. The buy orders sealing Changan Automobile at its upper limit still amounted to 400,000 lots, and the number of pending orders continued to rise.

“Could there be some hidden positive news?”

Liao Guopei muttered pensively.

Whether in the A-share market or the U.S. stock market, there would always be people who learned insider information ahead of time and positioned themselves in advance.

The fact that even the hot-money traders’ selling could not shake this “iron floor” made Liao Guopei hesitate.

He was not the only one. Chen Sanrong, far away at the China Merchants Securities branch on Hongling Middle Road in Deep City, was also wavering.

The immovable 400,000-lot buy order meant that fresh capital had entered the market.

“Liquidate everything?”

“Or wait and see?”

By then, all seven hot-money traders who had participated in the initial ignition had already reduced their positions by half. Even if the stock later suffered consecutive limit-down sessions, they would most likely still break even.

After struggling internally for several dozen seconds, Chen Sanrong ultimately decided to liquidate everything.

After selling all his shares, he had earned a total profit of 1.474 million yuan. He had held the position for twenty-three days, and the return was already extremely satisfying.

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Liao Guopei and the other five hot-money traders, however, chose to retain half their positions and wait to see how Changan Automobile performed during the day.

…

Metropolitan Finance University.

The library.

After liquidating his position in Changan Automobile, Zhang Yang did not chase the rising banking stocks. Instead, he placed his funds into a one-day government bond reverse repo.

What was a government bond reverse repo?

Simply put, you lent your money to an institution, which used government bonds of equivalent value as collateral. When the transaction matured, the institution not only returned your principal but also paid you interest, making it somewhat equivalent to a bank demand deposit.

The institution would then use your money to lend to clients in the market who needed financing. This was what people commonly called leveraged capital.

It was worth noting that buying a one-day government bond reverse repo on Thursday earned three days’ worth of interest. This was because such transactions followed a T+1 settlement system: the funds became available on the next trading day but could not be withdrawn.

In plain terms, if you bought a one-day government bond reverse repo on Thursday, the money would return to your securities account on Friday. You could use it to buy stocks, but you could not withdraw it to your bank account.

The funds would remain tied up from Friday through Saturday and Sunday, the two non-trading days, and could only be withdrawn to a bank account on Monday. Since they were occupied for a total of three days, the interest was calculated accordingly.

Seasoned investors would usually buy government bond reverse repos while waiting for the market.

Many beginners, however, overlooked the reverse-repo function and consequently lost hundreds, thousands, or even tens of thousands of yuan in interest over the course of a year.

Because Zhang Yang knew the inside information from the routine meeting, he understood that no new round of monetary stimulus was likely to be announced. The market would probably plunge at the opening the next day, so instead of chasing the rise, he went straight into a reverse repo.

In the A-share market, opportunities were never in short supply. The fundamental reason retail investors lost money was that they rushed into the market in a panic, then hurriedly rushed out. Put simply, they lacked patience.

After finishing the trades in his own live account, Zhang Yang began operating Lai Weijie’s simulated account. Without even looking at the details, he liquidated the entire position in Changan Automobile without the slightest hesitation.

If Lai Weijie had not asked him to control the account’s score, Zhang Yang probably would not have liquidated it.

Changan Automobile still had 400,000 lots sealing the upper limit, and analysis of the gradually expanding volume trend suggested that someone was unloading shares slowly, most likely a hot-money trader.

If hot-money traders were selling in large quantities while the stock remained firmly sealed at its upper limit, it meant that the major funds controlling the stock were sharply divided. Unless a black-swan event occurred, the stock would probably continue rising.

Lai Weijie’s account had bought Changan Automobile with its entire 1.043 million yuan. After four consecutive limit-up sessions, the total return was 46.32 percent, with a total profit of 483,200 yuan. The account balance had now reached 1.5262 million yuan.

“Tsk.”

“It’s gone up that much.”

After thinking for a moment, Zhang Yang decisively divided the funds into four portions and used them all to chase the four major state-owned banks.

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Lai Weijie wanted him to “control the score,” and the current return had clearly exceeded their agreement. Zhang Yang could only find a way to lower it slightly.

He then opened Xu Zhiruo’s simulated account and praised her with a faint smile. “Not bad. You knew to buy an automobile-sector ETF.”

When He Jing had previously asked him which sectors had potential, he had mentioned automobiles.

Automobile stocks had been deeply oversold under the shadow of the economic crisis from 2007 to 2008. Although the sector had already undergone five months of recovery, it was being further propelled by stimulus policies such as the “Automobiles to the Countryside” campaign and replacement subsidies. Moreover, household automobile penetration in 2009 was only 14 to 18 percent, leaving enormous market potential. Automobile-related stocks could be considered the most stable sector of the coming decade.

Xu Zhiruo deserved praise for another reason as well: she had bought an automobile ETF fund, making her position even more secure.

Many investors perhaps did not know what an on-exchange ETF fund was.

Put simply, it was a basket of stocks from a related sector.

For example, an automobile ETF might hold 12 percent in Changan Automobile, 12 percent in BYD, 10 percent in Metropolitan Automobile, 5 percent in Great Wall Motors, and so on.

If you invested one million yuan, it would be equivalent to holding 120,000 yuan of Changan Automobile, 120,000 yuan of BYD, 100,000 yuan of Metropolitan Automobile, and smaller positions in various other automobile stocks.

The advantage of buying an on-exchange ETF was that you did not need to understand the operations or annual reports of the individual companies. You only needed to correctly judge the sector’s broad direction to make a profit.

For example, once the Four-Trillion-Yuan Plan had been implemented, you might believe that infrastructure and real estate were about to take off, yet not know which stocks corresponded to those sectors. In that case, you could simply buy on-exchange infrastructure and real-estate ETFs.

Of course, ETFs were not advantageous in every respect. Since they consisted of a basket of stocks, their gains would certainly be lower than those of leading individual stocks.

Changan Automobile, for instance, had hit the limit-up four days in a row, while the ETF funds holding it had risen only 10 to 15 percent over the same period, dragged down by the other automobile stocks.

Click, click—

Zhang Yang quickly clicked the mouse and sold all of Xu Zhiruo’s stocks and funds, freeing up a total of 1.236 million yuan. This corresponded to a return of 23.6 percent, which was still somewhat short of breaking into the top ten among professional traders.

“I’ll stay out of the market and wait for the banks to pull back tomorrow. If they don’t plunge, I’ll look for another opportunity.”

Zhang Yang murmured inwardly.

He then opened Baidu Tieba, logged into the account named Joker, and continued sharing his A-share trading activities for the day on the stock forum.

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