Travis Johnson

China Rebalancing ETF Pair Trade

This all depends somewhat on Chinese investor philosophy, which I don't personally understand particularly well -- but I do think it's important to consider that there is also a flip side here. How often do individual investors seek to leave hot markets? If you were an individual investor in the Shanghai market, holding A shares that you see climbing better than 100% a year, would you want to sell them to buy shares that have recently gone up much less?

If you're a careful and seasoned investor, that's probably "yes" -- but are average Chinese retail investors careful and seasoned? Or are they similar to the Nasdaq day traders of 1999? Remember, US investors had all the freedom in the world to invest overseas as the nasdaq bubble was inflating ... but did they? Not really -- the real foreign investing boom for US investors came many years after the crash.

This is not to say that there isn't demand to diversify internationally among Chinese investors -- I'm sure there is, particularly to get into Hong Kong shares of companies they know, and for companies with dual listings I expect there will be, eventually, a significant arbitrage opportunity as you're noting. I just don't know that it will be as dramatic as many people are predicting -- there's unlikely to be a mass exodus from the A shares, in my opinion, until after (if) that market corrects dramatically.