Highlights
- Chinese investors strategically manipulate Australian rare earth mining company stocks through tactics like market selling and short-selling.
- Government regulatory bodies struggle to effectively prevent or prosecute market manipulation in the rare earth mining sector.
- Structural weaknesses in global capital markets are being systematically exploited to maintain China’s dominant rare earth supply chain position.
The rare earth industry has recently faced significant challenges due to foreign investment maneuvers and market manipulation tactics. Notably, companies like Arafura Rare Earths and Northern Minerals have encountered complex situations involving Chinese investors, leading to regulatory interventions and broader discussions about the integrity of global capital markets.
Arafura Rare Earths and ECE Nolans
East China Exploration – Nolans (ECE Nolans) is the Chinese investment arm for China in Australian rare earth mining, which was bought into Arafura in 2012. However, when it became apparent that any takeover would likely be rejected by the Australian Foreign Investment Review Board (FIRB) they decided to divest the shares they had bought. Arafura had offered to sell their shares off market to a buyer (which would have kept the share price higher and not created selling momentum), instead ECE Nolans decided to sell their shares on the open market which had the effect of destroying the share price. This was an obvious tactic to dissuade further investment in Arafura.
This also created an opportunity for short sellers. It is speculated that at least some of the short position during 2023-24 may have been through China linked entities. Due to the opaque rules that govern shorting on the ASX, and an underfunded and uninterested Australian Securities and Investment Commission (ASIC) they did nothing. (See below Elon Musk’s discussion why regulators are not incentivized to prosecute in these situations).
Northern Minerals and Foreign Investment Scrutiny
Northern Minerals, known for its Browns Range rare earths project in Western Australia, has also faced scrutiny over foreign investment. In June 2024, the Australian government ordered several Chinese-linked investors to divest their shares in Northern Minerals, citing concerns over national interest and compliance with the Foreign Acquisitions and Takeovers Act. The divestment order affected approximately 10.4% of Northern Minerals’ issued share capital.
Despite the government’s directive, reports indicate that compliance has not occurred. As of March 2025, at least one entity had not fully divested its holdings, prompting potential further governmental intervention.
This is a classic stalling technique, using the Australian Government’s slow bureaucratic processes to delay the divestment. In the meantime, this again dissuades investment in Northern Minerals due to the uncertainty of what will happen.
Market Manipulation and Regulatory Challenges
Beyond direct investment concerns, there are broader issues of market manipulation affecting Australian and global capital markets. High-frequency trading and short-selling practices have raised questions about market integrity. For instance, in South Korea, authorities have implemented measures to curb short-selling to protect investors and maintain market stability. These developments prompt consideration of whether similar strategies could be beneficial in the Australian and global context.
For those interested in the techniques used by these large institutions to manipulate the stocks of companies, watch Jim Crammer explain how it works on this video that was never intended to be released outside of the company it was filmed to be shown internally.
Recommendations for Strengthening Capital Markets
To address these challenges and enhance the resilience of capital markets, several measures could be considered:
- Implementing a Transaction Tax: Introducing a minimal tax on each trade could deter high-frequency trading practices that contribute to market volatility. The revenue generated could fund regulatory bodies tasked with overseeing market activities.
- Enhancing Short-Selling Transparency: Mandating real-time disclosure of short positions would increase market transparency, allowing investors to make more informed decisions and reducing opportunities for manipulative practices.
- Sector-Specific Shorting Regulations: Implementing restrictions or bans on short-selling in vulnerable sectors, such as early-stage mining companies, could protect these entities from undue market pressures and manipulation.
- Strengthening Regulatory Agencies: Providing adequate funding and resources to regulatory bodies like the Australian Securities and Investments Commission (ASIC) or the SEC would enable more effective monitoring and enforcement against market manipulation.
- Holding Institutions Accountable: Establishing legal frameworks that hold both individuals and institutions accountable for market manipulation would deter unethical practices and promote a fairer market environment. This is done for workplace health and safety. Why not for the financial markets?
Conclusion
The challenges faced by companies like Arafura Rare Earths and Northern Minerals underscore the need for vigilant oversight and proactive measures to safeguard global capital markets. These capital markets can foster a more transparent, fair, and resilient financial ecosystem that supports sustainable economic growth by addressing foreign investment complexities and market manipulation tactics.
China is leveraging structural weaknesses in global capital markets by exploiting regulatory loopholes to suppress the share prices of rare earth mining companies. This strategy discourages investment in these projects, delaying their development and market entry. By doing so, China aims to maintain its dominant position in the rare earth supply chain and obstruct the emergence of a competitive ex-China rare earth market.
Elon Musk’s view – In his conversation with Lex Fridman, Elon Musk criticized the U.S. Securities and Exchange Commission (SEC) for failing to protect retail investors from hedge funds engaging in short selling and market manipulation. He argued that SEC lawyers, who are not highly paid, often seek future employment with top law firms representing these hedge funds, leading to a conflict of interest. This situation, Musk suggested, results in regulatory capture, where regulators prioritize their career prospects over enforcing rules that protect individual investors.
For a more in-depth understanding of Musk’s perspective on this issue, you can watch the relevant segment from the Lex Fridman Podcast:
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