When people borrow a stock that is trading at a higher price predicting that its price will fall at a specific time in the future to sell it at that high price immediately upon borrowing only to buy it back at the lower price should it materialize as speculated to return it to the lender of the stock is known as shorting in the lingo of the traders. This was how a few venerable firms on Wall Street were run down to the ground and out of town in the recent financial crisis.
Shorting is normal trading practice except when it is used as a weapon in competition. Then it borders on illegality. Often, shorters spread rumors to run down the stock they borrowed after borrowing and selling it. To give credence to the rumors, they spread misinformation or misinterpreted data, deliberately.
Just as it was feasible to create crises in currency and bond markets about a decade ago around the world, which China and India had escaped, many may be of the impression that it can also be done to China. After all, China has about $2 trillion in dollar reserves and a large crisis makes for a lot of bonus money if China is economically destabilized.
On the one hand, such a strategy could even be getting implicit blessings from politicians in Washington frustrated with Chinese cheap goods and Wall Street’s inability to rid itself of the addiction. But on the other, this convergence of Wall Street trying to placate the upset American people and their elected officials and Chinese intransigence could result in Wall Street and the United States suffering more, not less. And sugar coating such financial aggression as the spread of democracy may not serve the national interest well either.
It is likely that China in fact wants to encourage such tendencies in U.S financial markets as they seek to find their next big gig for their December 2010 payouts after having run everything else dry by 2009. Never mind that there is plenty to do in the United States. After all, betting on commodities is bad because it could be inflationary, so China looks juicy and stubborn at the same time because it does not want to let U.S investment in on American terms (something the United States has gotten used to since the end of the Cold War in particular). To change that, the motivation appears to be to want to shake things up a bit, and perhaps to even to make the point that the Chinese monolithic and authoritarian economic system is just as bad as ours, as if to win the contest of wills on individual liberty.
Shorting China by borrowing from them first and then taking them down to drain their dollar reserves both internally and abroad could be American naïveté and Chinese shrewdness. The quality of information out of China is highly murky for foreigners. If the non-transparent Chinese data is misleading to make reasonably safe bets against the Chinese economy, those making those bets could lose money similar to Long Term Capital Management (LTCM).
LTCM-type bombshells induced by the Chinese by acting on the psychological vulnerabilities of Wall Street investors could bankrupt the yield-seeking and barely recovering American banks and the dollar could plunge in a currency crisis. Then, to save us the Chinese would ride in with U.S dollars to buy considerable interests in U.S financial firms to build their capital markets on their terms of knowledge transfer on the cheap. The hunter with the boomerang would become the hunted.
It would be wise if Washington and Wall Street focused on the United States to change China, and we do not need the Chinese dollar reserves to change ourselves.