Chinese Investors' Casino Mentality May Make Sense Given the Alternatives

Jim Wiandt's recent post (Five Most Interesting Asian ETF and Indexing Stories Currently Playing Out) raises some interesting points and questions.

Jim, first you mention that passive investing hasn't taken off in Asia in the same way it has elsewhere. Is it possible that active managers do better there? I haven't seen any hard data on Asia specifically, but I know anecdotally that many international active mandates target higher alpha in Asia than they do in the U.S. and Europe.

Second, you handicap the emerging markets and put China and Asia ahead of both India and Brazil. I think I agree with that, but I'm not sure why. Infrastructure? Rule of law? For what it's worth, I don't buy the population argument. In fact, the population argument biases against China long term: It faces a rapidly aging population with a growing state burden for elder care. Contrast that to India, where the working age population is growing incredibly fast.

Third, on the A-H share premium, I don't think it's patronizing to say that mainland Chinese investors have developed a "casino mentality." That always happens when markets go up 300% in two years; everyone sees their neighbor getting rich and they want a piece of the pie. There was DEFINITELY a casino mentality at work in tech shares during the 1990s; I remember what it felt like.

You're right about supply and demand, though. The big point is that Chinese investors have money and it has nowhere to go. Maybe relative to the limited other options available to mainland Chinese investors, even an overvalued stock market is a good bet. I don't have up-to-date figures, but this article points out that as of June 2007, bank deposits were a losing proposition in Beijing: The benchmark rate on one-year deposits was 3.06%, which fell to 2.45% after the 20% tax on interest was levied. Meanwhile, inflation was rising at 3.4% ... meaning you lost 1% of your money per year on bank deposits. Anything is better than that!

One final point: The reason for the A-H premium ... and the reasons the arbs aren't working on it ... is that you can't short Chinese A-Shares.

Written by Matthew Hougan

Comments

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[huangthomas]

WW II started in China in 1937, not 1941. After the war, civil war and communist (Mao) rule followed. The modern day stock market in China officially open in early 1991. During the 54-year lapse, at least two generations of Chinese grew up never heard of stocks or stock market, not to mention "investment"... The newly opened stock markets (Shanghai and Shenzhen) are replay of the wild west. Pump and dump scheme, investment clubs, insider trading, rumors, and ........ The market is government policy-driven. Lessor official related to policy making are the major souces of insider trading. If I were to invest in that market, I would play it like a casino too.