Chen Pingjiang himself didn't have much of an idol burden, let alone on foreign social media, so he just cursed back.
Moreover, for foreigners, if you don't react, they will really think you're easy to bully.
You have to hit them hard, beat them until they hurt.
Someone like Musk is constantly clashing with short sellers on Twitter.
Carsten Block: [This is a personal attack, haha, are you anxious because I asserted that Renren.com's stock price would fall? @Chen Pingjiang]
Chen Pingjiang immediately followed up with a post: [Idiot isn't cooperating with me.]
The war of words between these two attracted countless onlookers.
Surprisingly, the number of people supporting Chen Pingjiang far exceeded those supporting Carsten Block.
The main reason was the vast difference in their status.
If Carsten were Chinese, he probably wouldn't even be fit to carry Chen Pingjiang's shoes.
Chen Pingjiang's task for the day was to heavily promote his Twitter and Facebook accounts, allowing more people to see his confidence.
Quite coincidentally, throughout the entire day, the short sellers made no further moves.
This didn't mean they surrendered; they were just temporarily lying low, planning to act again only when the momentum of Renren.com's positive performance had largely dissipated.
By market close, Renren.com's stock price had surged by 3.7%, reaching $167.06.
However, later that day, a rumor began to circulate.
The SEC (U.S. Securities and Exchange Commission) was considering sending an inquiry letter to Renren.com regarding whether the allegations of game data fraud in the Muddy Waters report were true.
There's no smoke without fire!
Chen Pingjiang immediately figured that this matter was probably reliable.
Who would believe there aren't people from major institutions within the SEC?
Let's not even talk about vested interests.
Everyone dines in the same circles; at the higher levels, they generally all know each other.
Sending an inquiry letter is a piece of cake.
Who doesn't know these tactics used by foreigners?
The China Oil Futures Fund liquidation, the Tsingshan Nickel incident, and the Berkshire event on June 3, 2024, had long exposed their true colors.
On April 21, 2020, the Chicago Mercantile Exchange's WTI May futures contract price closed at -$37.63 per barrel, falling into negative territory for the first time in history.
This was an extreme performance amidst the severe turbulence in the global crude oil market during the pandemic, causing all "China Oil Futures Fund" long position holders to lose everything. Chinese investors suffered a massive loss of 20 billion.
In the Tsingshan Nickel incident, foreign short sellers failed in their encirclement, facing tens of billions of RMB in compensation, but the London Exchange directly announced the cancellation of $3.9 billion worth of trades.
The Berkshire event on June 3, 2024, was even more bizarre.
Numerous investors purchased shares of Buffett's company at reasonable prices, with most transaction prices around $640,000 per share.
However, the NYSE directly announced a technical glitch and declared the transactions invalid.
What was terrifying wasn't the normal cancellation of transactions, but directly altering the money in your account, changing it however they wished.
On this day, major financial newspapers and news media in the United States were also busy.
They were basically divided into two factions: one believed Renren.com had fabricated data and had a bubble, while the other believed Renren.com was performing well.
Of course, the latter faction was internet trolls paid by Chen Pingjiang.
Without buying trolls, he couldn't win. Without his own voice, if all US newspapers and programs said Renren.com was going to fall, Chen Pingjiang couldn't possibly withstand it.
Since that's the case, he might as well muddy the waters, mixing truth with falsehoods, so that investors couldn't see clearly and thus wouldn't act rashly.
It turned out that this tactic was also exceptionally effective.
Here, it must be mentioned again that when domestic companies face short selling, they only try to prove their innocence.
No one ever thought of fighting back on Twitter and in the media.
Abroad people were concerned, and domestically people were also concerned. Not to mention financial media, many domestic investors who trade US stocks were also watching.
One side said it would fall, the other said it would rise.
The side predicting a fall presented various data, while the rise was attributed to Renren.com's firm belief in its own stock.
This left the vast number of investors unsure of what to do.
Some timid ones chose to secure profits and sell off a portion first.
The bolder ones still intended to hold on.
On November 10th and 11th, there was no major movement.
Instead, due to Renren.com's share repurchase plan officially taking effect, its stock price once again broke the $170 mark, reaching $171.42.
It seemed prosperous, but Chen Pingjiang couldn't relax.
Everyone's eyes were fixed on November 14th, which was Monday.
On Saturday, November 13th, the King of Short Sellers, Howen, posted a photo on Twitter of the box of torn shorts Chen Pingjiang had sent.
[Shorts received, but the quality seems ordinary. Thank you, my Chinese friend. I have a gift for you on Monday.]
The words were full of provocation.
This tweet also hinted at a major battle on Monday.
Eastern US time, 9:30 AM on November 14th.
"Renren.com opened slightly lower!"
"Pre-market price $170.68!"
"So excited!"
Domestic investors watching the drama were following this bull-bear battle.
For an hour after opening, Renren.com's stock price fluctuated slightly, neither rising nor falling significantly.
At 10:30 AM Eastern US time, which was 10:30 PM domestic time, Board Secretary Gao Jie hurried over with a phone, his expression grave:
"Chairman Chen, it's the SEC."
A glint of cold light flashed in Chen Pingjiang's eyes; sure enough, it had come.
...
Eastern US time, 3:00 PM; domestic time, 3:00 AM.
Renren.com issued an announcement stating that it had been requested by the U.S. Securities and Exchange Commission (SEC) to provide financial records since January 2011.
Renren.com stated that it had hired consultants to investigate the allegations made by market research firm Muddy Waters and could not predict the duration or outcome of the SEC investigation.
After the announcement was released, Renren.com's stock price immediately crashed.
$168.43!
$164.72!
$159.67!
...
By market close, Renren.com's US stock price was $152.84, plummeting by 12%!
The hard-earned two or three days of upward trend were erased in an hour.
An SEC investigation is, of course, a negative impact.
Basically, when institutions publish short-selling reports, the targeted companies face investigations. Both iQiyi and GSX Techedu have been targeted this way.
If you say there's no connection between the two, do you believe it?
When iQiyi faced investigation, its stock price plunged by 19% during the trading day, and GSX Techedu suffered even worse, with its stock price cumulatively falling by 26% over two trading days.
After the market closed, everyone stayed to review the day's events.
Bu Housheng said:
"Short sellers took advantage of the SEC investigation news to frantically increase their positions, and some institutions also bought three-month put options on Renren.com. We need to come up with corresponding solutions tomorrow, otherwise, there will be another sharp drop."
"In this wave, we have many unfavorable factors, Chairman Chen. Should we still accumulate shares?"
Chen Pingjiang nodded without hesitation:
"Of course, the plan remains unchanged. Don't stop unless I say so."
Bu Housheng's expression was somewhat displeased:
"But if we use a large amount of cash and get trapped at a high price, we won't be able to escape. Now, major short-selling institutions are not only attacking us from the angles of sensitivity and relevance but many are also using a contrast strategy. It's the common saying, 'the higher the expectation, the greater the disappointment.'"
"For foreign hedge fund managers, our Renren.com is an indispensable tool for 'shorting China'. These people, either bearish on China or hedging risks from investing in China, often choose stocks with good liquidity. Our Renren.com's 'securities lending' interest rate is relatively low, naturally making it the biggest basis for overseas investors to short China."
In Bu Housheng's words, shorting Renren.com's stock price had become a consensus, a convergence of forces from multiple dimensions.
So what if the stock price falls? It can always rebound later if performance is good; there's no need to contend for a momentary gain.
1. Chinese concept stocks.
2. Stock price rose too sharply in the past year.
3. Poor global economic environment.
Chen Pingjiang tapped the table and said:
"Precisely because we are a representative of Chinese concept stocks, we absolutely cannot fall. Otherwise, these people will unscrupulously short Chinese concept stocks in the future. If we retreat this time, what happens if this group waits three months or half a year for our stock price to rise again and then comes back to harvest us once more? In the long run, who would dare to buy our shares?"
In short, Chen Pingjiang didn't want Renren.com's stock price to become 'leeks'.
Once grown, they would be harvested!
Just when everyone was at a loss, Chen Pingjiang suddenly had a flash of inspiration and thought of something.
Then he looked up and asked Bu Housheng on the screen opposite:
"Is naked short selling allowed in US stocks now?"
Bu Housheng shook his head:
"No, it's not allowed. After the 2008 financial crisis, the SEC permanently banned naked short selling because they believed it was one of the main factors leading to Lehman Brothers' bankruptcy."
After a pause, Bu Housheng asked:
"Mr. Chen, are you thinking of the 'Battle of the Century' when Porsche acquired Volkswagen?"
What happened when Porsche acquired Volkswagen?
In short, during its acquisition of Volkswagen, Porsche acquired 74.1% of Volkswagen's shares through various means, including buying stock and options.
At this point, short sellers entered, and through a combination of short selling and naked short selling, the short interest reached 10.4%.
Now, the problem arose: Porsche held 74.1% of Volkswagen's shares, and the German government held 20.1%, totaling 94.2% of shares.
This meant that only 5.8% of the shares were left in the market, while institutional short interest had already reached 10.4%.
Even if short sellers bought all 5.8% of the available shares, there would still be a 4.6% gap that couldn't be filled. These 4.6% shares were created out of thin air through naked short selling.
No one wanted to be among that remaining 4.6%, as it meant going to jail.
So, as soon as the market opened, short-selling institutions began frantically buying up Volkswagen shares.
Amidst the frenzy, the stock price soared like a rocket, rising from 200 euros to 1005 euros in just two days, a direct five-fold surge, inexplicably making Volkswagen the world's highest-valued company.
However, this severely disrupted normal market trading, and the exchange couldn't sit still.
It brought Porsche and these short-selling institutions together for negotiations, hoping Porsche would release 5% of its shares to allow the short sellers to cover their positions.
Porsche didn't need to push things to the extreme; it could release 5% of the shares, but they had to be priced at the inflated 1005 euros per share.
Everyone knew Volkswagen wasn't worth that price; Porsche was just taking the opportunity to extract a hefty sum from the institutions.
After this event, the stock price would inevitably return to normal, and then Porsche could buy them back at a low price.
Short-selling institutions could only reluctantly accept the 1005 euro price, which is what short squeezes are most feared by short sellers.
At that time, Germany's fifth richest person ultimately chose to commit suicide by lying on train tracks because of this event, also marking Porsche's complete victory over these capital short sellers.
Chen Pingjiang shook his head:
"Yes and no, it's roughly the same idea. If we want to win this round, we can only focus on naked short selling. There should still be a way for US stocks to achieve the same effect as a short squeeze, right?"
The reason he asked this was that Chen Pingjiang had thought of the GameStop incident.
— The GME (GameStop) Bull-Bear Battle.
Short sellers were badly beaten, eventually forced to pull the plug.
The stock surged from $4 to a high of $483, and short sellers were forced to use multiple tactics.
Key figures were threatened, forums for investor communication were shut down, and several brokers were officially prohibited from buying GME, only allowing selling.
If this isn't blatant hooliganism, then what is?
Many people in China made a significant profit from it at the time.
Bu Housheng, on the screen opposite, clearly didn't understand what Chen Pingjiang was saying.
"Mr. Chen, without naked short selling, there won't be extra shares created out of thin air, and short sellers won't be squeezed."
As mentioned earlier, normal short selling involves borrowing shares from an institution, selling them at a high price, then buying them back at a lower price and returning them to the broker, generating profit. This is normal short selling.
Naked short selling, on the other hand, involves selling shares one doesn't possess on the market on the same day, without borrowing them, only needing to acquire the shares within three days for delivery.
This back-and-forth creates extra shares.
The German tycoon being forced to commit suicide by lying on train tracks was due to such an operation.
With naked short selling banned, such operations are out of the question.
A group of people frowned and pondered for half an hour, then suddenly saw Chen Pingjiang jump up excitedly, rubbing his hands together and gesticulating wildly.
"I've got it!"
"Market makers, market makers are the key!"
Looking at the circle of bewildered faces around him, Chen Pingjiang continued to explain:
"We buy call options through market makers. Old Bu, if you were a market maker, what would you do?"
Bu Housheng thought for a moment and said:
"If I were a market maker, I definitely wouldn't want to take risks. I'd earn my fees, and I would necessarily buy a corresponding number of shares in the stock market to hedge against the risk. This way, no matter if the stock price rises or falls later, the market maker wouldn't lose money."
Chen Pingjiang excitedly snapped his fingers:
"Correct. In short, for every call option contract sold, the market maker will buy a certain amount of stock to hedge the risk they undertake. More importantly, the price of the option contract is much lower than the strike price.
Assuming the strike price is $20, the option contract price might only be $1-2, meaning options can leverage 10, 20 times. Only a small amount of capital is needed to buy a large number of call options, but we can force market makers to proactively buy Renren.com stock to hedge against risk."
Bu Housheng's eyes lit up. He looked at Chen Pingjiang with a gaze like he was a genius, and his tone also became excited:
"In that case, the circulating shares in the market are already pitifully few, so such a situation will form: on one hand, brokers will need to buy shares to hedge the risk of call options; on the other hand, Wall Street institutions' short-selling trades will also require buying shares at settlement.
This will lead to a severe shortage of circulating shares, causing the stock price to skyrocket, ultimately resulting in Wall Street short-selling institutions being liquidated and forced out."
"Furthermore, we don't have many circulating shares on the market, which provides the basic conditions for this operation. The only problem now is, where are we going to find so many disinterested third parties to buy Renren.com's call options!"
Chen Pingjiang raised an eyebrow:
"Is that difficult? Just pick a reliable foreigner to handle it, and make sure to cover our tracks so those short sellers and the SEC don't find out."
(End of Chapter)