Travis Johnson

Reduce Your Chinese Holdings Before the National Party Congress Begins

Interesting perspective, I'm glad to hear it -- but I also don't see much that's similar between the Chinese stock market in 1997 and 2002 and the situation in 2007. In 2002 and 2003, the overall market performance was generally quite weak, the shares ran up nicely in 2000-2001, but fell off for the next couple years.

Though there may be an impact from the party Congress, either positive or negative, I would hesitate from this small sample to say that those changes were caused by the Congress, especially since I have no idea what the news flow was around that time. And I would definitely be careful about comparing the impact on a stagnant and tiny market in 1997 and 2002 to the impact on a much larger, wildly booming market in 2007. Compared to the period from January 2006 to the present, as I read the chart, the entire previous history of the Chinese stock market might as well be a flat line. This Congress might have a short term impact, as you're implying is possible, but probably the announcements made at the Congress, whether positive or negative, will have a far larger impact on this much more news-focused, momentum-driven market ... all just a guess on my part, of course.

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.