Muddy Waters Yurun Rumor Proves That China Fears Run Wild

For the past few months I have both been tracking the rise of Carson Block’s muck-raking research firm, Muddy Waters, and the rise of the China fraud story cycle and today it appears the two have collided as fears of a report on Yurun Food Group by Muddy Waters have caused a drop in the stock before any report has appeared.

For those of you unfamiliar, Muddy Waters is a research firm with a sideline in shorting stocks which has exposed several cases of shady dealing by publicly listed Chinese firms in the last few months, including China MediaExpress, Orient Paper Inc, and Sino-Forest Corporation. Following the reports, each of these companies have seen their share prices plummet in the face of apparent evidence of corporate malfeasance.

During the same period as Muddy Waters has been on the rise, the China news cycle has turned undeniably bearish, with many cases of fraud suddenly being exposed and articles appearing such as “10 Ways to Short China,” and “Why China is Headed for a Hard-Landing.” These stories go viral on the Internet because as China’s growth tapers off and the worldwide business climate is becoming more uncertain, many investors and other observers are waiting for something bad to happen.

Having lived through the euphoria and crash of Southeast Asia in the 90s, the dot-com bubble a few years later, and now the last nine years (yeah, I’ve been in on all those deals for bettor and worse), I tend to think that the story is seldom as good as people believe it to be when the market is on the downswing, nor as bad as people say it is when markets are coming crashing down.

But rational thinking is bad for hysteria, and when a company can be brought down just on the rumour of an upcoming report from a small research company, then it’s time to certify that panic has officially set in.

Even if you don’t really want to short China, maybe now would be a good time to start going with the flow.