
China's Market Eclipse - tokenadult
http://www.bloomberg.com/gadfly/articles/2016-07-05/china-vanke-s-eclipse-casts-light-on-market-dysfunction
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chollida1
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.

You are actually getting something called an ADR. see:
[http://www.investopedia.com/university/adr/](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? :)

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zhoutong
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.

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Animats
_" 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.

~~~
seanmcdirmid
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.

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Aelinsaar
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.

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rrggrr
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.

~~~
nickff
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'.

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rrggrr
Dodd-Frank != Sarbanes-Oxley. You are confused.

~~~
nickff
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,

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B1FF_PSUVM
Sheesh, it's 1986 all over again, except that instead of "Japan this" and
"Japan that" and "Yet another Japan thing", it's China.

Even Chinese tourists, instead of Japanese ones.

~~~
mahranch
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.

