LJ

Chinese Castle in the Air: The A-Shares Craze

I believe these institutions could do that by selling the index futures in a stock exchange, or through some underground channels if the institutions are hedge funds.

In the case of Taiwan, foreign institutional investors cannot short sell individual shares. However, they would still be able to initiate a huge short position through the MSCI Taiwan shares index futures traded in the Singapore Exchange. This explains why EWT has been so volatile and has not been able to trade in tandem with the actual Taiwan's TWII Index for so many years.

I don't think this technique is widely accessible to private investors.

Chinese Castle in the Air: The A-Shares Craze

A friend of mine who is in the financial sector told me a different story. According to him, the large discount in CAF or other A-share exchange trade funds is just a reflection of a trading strategy commonly used by hedge funds.

Many institutions who were granted QFII went short on the A-share exchange trade funds, such as 2823.hk, CAF or IFXAF.PK. At the same, they used the cash proceed from their short positions to go long on some best-performing stocks in the Shanghai stock market. In so doing, they can benefit from the so-called China boom without injecting any capital into the Shanghai Stock market. Since many mega-cap stocks in China usually trade in tandem with the Shanghai Composite Index, the chance of losing big money is not high.