What the author is describing is similar to what was going on with the Mt Gox exchange a few years ago.
You have a product that should be fungible trading at two exchanges. In one exchange you have a free market and what should be very close to the true price of the product. In our example this would be most of the bitcoin markets and the Hong Kong stock exchange. In another market for some reason the price has become dislodged from its true price, this is usually due to liquidity issues. In our example this is the Mt Gox exchange and the Shenzhen stock exchange.
Now there is what appears to be an obvious arbitrage opportunity but if you look closer, and you really don't need to do any real in-depth analysis to figure this out, you'll see that the market is acting rationally by pricing in the liquidity issues to the shares on one exchange.
I mean, if the shares don't trade and you aren't sure when the regulators will let them trade you essentially have an illiquid asset that you can only really trade by brokering a trade yourself with a counter party outside of the stock exchange. And if you ever wondered what liquidity was worth, well you're going to find out that liquidity can be very expensive.
It will be interesting to see just how far the Chinese regulators will push this as it could have spill over effects onto the American and European stock markets.
So if you've ever thought about what you actually own if you buy a share of a Chinese company on a US stock market, say Alibaba( BABA US Equity), you aren't actually getting a share in Alibaba in the same way you can buy a share in Microsoft.
It's somewhat similar to the brief case full of IOU's that Jim Carey hands over in the movie Dumb and Dumber. Given that you don't own actual shares in the Chinese company but a proxy for them, the Chinese regulators can have a very chilling effect on these shares by shutting down trading of the actual shares in their market as described in the article.
If regulators were to say suspend trading for Alibaba shares in China, its not entirely clear how to go about pricing their respective ADR shares that trade in the US, well at least it isn't to me. Fundamental valuations would still be useful but what discount would you give them, given that the underlying shares are no longer trading on their home exchange, and what exactly would you own in this case?
TL/DR
Or put another way liquidity has value, maybe the HFT value proposition was right after all? :)
Except in this case it's the Hong Kong stock exchange with the lower share price. Almost all A-H dual-listed companies are relatively overvalued in A-share market and undervalued in H-share market, and it has been the case for the last 10 years.
There's no effectively way to arbitrage this other than waiting for "all future cash flows" to be realised and discounted to present. It's the same share in the same company, with equal voting and distribution rights, but you just can't take one share bought in Hong Kong to Shenzhen to sell.
Among the Chinese investors, it's commonly accepted that A-share has a price premium because its price is likely to go up more in a bullish market. Given the largely speculative nature of the Shanghai/Shenzhen markets (compared to the more "rational" western-style Hong Kong market), having the same voting and distribution rights is far from enough to cause a convergence in share price.
"Almost all A-H dual-listed companies are relatively overvalued in A-share market and undervalued in H-share market, and it has been the case for the last 10 years."
This may reflect the lower value of non-exportable yuan.
China is a huge captive market with few investment options, actually. Your choice is either to figure out how to get your money out into a convertible currency, invest in bubbly real estate, or play in a market with heavy insider trading problems.
>it's commonly accepted that A-share has a price premium because its price is likely to go up more in a bullish market.
Unless the government decides to suspend trading in them, in which case you're stuck with the shares with no way to trade them even if their value drops through the floor. It's market distortions on top of market distortions.
> So if you've ever thought about what you actually own if you buy a share of a Chinese company on a US stock market, say Alibaba( BABA US Equity), you aren't actually getting a share in Alibaba in the same way you can buy a share in Microsoft.
Isn't this similar to how American stockholders don't actually own the shares of stock, but rather the Depository Trust Company owns ALL shares of all stocks, and you only own a...Nomination(?)...to control the shares and receive the dividends?
If they went offline, could anybody buy or sell stocks?
They're more like an escrow than like the PRC. China could halt trading or eliminate a stock permanently, th DTC cannot. Anything it can/could do to cause permanent damage could be reversed by regulatory bodies and/or the government.
Interesting to note, even in the United States, it's not entirely clear what you do/do not own when you purchase stock. It's not even clear as to whether your broker owns the stock that you purchased. And, as it turns out, this actually has very real-world legal ramifications. See: http://www.bloomberg.com/view/articles/2016-05-13/t-rowe-pri...
This sounds spooky, but it sounds like more of what has been talked about for a long time; there is a huge element of fiction in the Chinese economy, and no one appears to be sure how much and where.
Not limited to equities, or to China. Regulators worldwide are weighing the systemic risks of now enforcing the transparency that should have always been present. Dodd-Frank is paying off now, finally as capital flees risk for the perceived, possibly very real safety of US markets.
Exactly how is Dodd-Frank paying off now? Most investors have seen US markets as the safest for at least a few decades, if not longer. Dodd-Frank may have expedited the decrease in the number of listed companies (through the imposition of large fixed costs which hurt small companies), but I see little evidence that investors feel any 'safer'.
Its clear its not doing much, but there's this HN narrative about how China can't be criticized and if it is then there's whataboutism with "The US is just as bad" which is often a false narrative. The Dodd-Frank is just something pulled out one's ass to promote that narrative. In reality, US markets are considered very safe even before Dodd-Frank. As much as HN claims $this_year is the end of the "petrodollar", its clear the the USD still rules and is considered a safe currency as well.
A year or two ago this forum was full of "rise of the BRICs" rhetoric. Russia's and Brazil's economy have stagnated with no end in sight, India is going nowhere, and China is playing 'house of cards' with its markets. Trust me, if you want investing advice, don't get it from HN. The narratives here are politically biased to promote an anti-US sentiment and other college identity politics groupthink.
Both have compliance costs, please give Dodd-Frank a thorough read, and you will see what I mean. There are some especially bad laws in there, such as the conflict mineral reporting requirement,
Well up until recently, Japan had the number 2 economy in the world. China just recently passed them so now it's all about China.
Due to their population size, there's a lot of potential but their economy is a giant mess. There are many separate huge bubbles forming in China right now, some larger than the U.S's largest economic bubble. Real estate and banking among them. Only, instead of popping organically as happens in every other economic system, the PRC has complete control of every facet so they just don't let it pop. Which causes it to grow even bigger. And that means when it does burst, it's going to come down a lot harder. They're putting off the inevitable. But they should realize that no economy can grow forever. It's never happened in 3,000 years of recorded history.
Japan never really suffered from this (oh they had bubbles, but they popped when they were supposed too) so I expect to see the country back in the number 2 spot when China's house of cards comes tumbling down. It will come tumbling down, that much is certain. The 'when', however, is not so clear. The PRC can do a lot to stave a collapse off, but I don't think it can do much about manufacturing moving out of the country, or people choosing other countries to have their cheap products made (Vietnam, Philippines, Singapore, etc). That's one of the few things they can't stop and have little control over. And China relies on its cheap exports -- It's a massive part of the country's income. If that goes, not even the government can plug the hole. It will cause a cascade effect, allowing all those bubbles to pop. It will be a sight to behold.
Basically, China is different from Japan. In size, scope and because their economy operates differently since it's under the complete control of the government. Japan's economy was more "normal", if there is such a thing.
You have a product that should be fungible trading at two exchanges. In one exchange you have a free market and what should be very close to the true price of the product. In our example this would be most of the bitcoin markets and the Hong Kong stock exchange. In another market for some reason the price has become dislodged from its true price, this is usually due to liquidity issues. In our example this is the Mt Gox exchange and the Shenzhen stock exchange.
Now there is what appears to be an obvious arbitrage opportunity but if you look closer, and you really don't need to do any real in-depth analysis to figure this out, you'll see that the market is acting rationally by pricing in the liquidity issues to the shares on one exchange.
I mean, if the shares don't trade and you aren't sure when the regulators will let them trade you essentially have an illiquid asset that you can only really trade by brokering a trade yourself with a counter party outside of the stock exchange. And if you ever wondered what liquidity was worth, well you're going to find out that liquidity can be very expensive.
It will be interesting to see just how far the Chinese regulators will push this as it could have spill over effects onto the American and European stock markets.
So if you've ever thought about what you actually own if you buy a share of a Chinese company on a US stock market, say Alibaba( BABA US Equity), you aren't actually getting a share in Alibaba in the same way you can buy a share in Microsoft.
You are actually getting something called an ADR. see: http://www.investopedia.com/university/adr/
It's somewhat similar to the brief case full of IOU's that Jim Carey hands over in the movie Dumb and Dumber. Given that you don't own actual shares in the Chinese company but a proxy for them, the Chinese regulators can have a very chilling effect on these shares by shutting down trading of the actual shares in their market as described in the article.
If regulators were to say suspend trading for Alibaba shares in China, its not entirely clear how to go about pricing their respective ADR shares that trade in the US, well at least it isn't to me. Fundamental valuations would still be useful but what discount would you give them, given that the underlying shares are no longer trading on their home exchange, and what exactly would you own in this case?
TL/DR Or put another way liquidity has value, maybe the HFT value proposition was right after all? :)