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How to Invest In Chinese Stock Markets (And Why You Absolutely Should Not!) | Economics Explained - YouTube
Channel: Economics Explained
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china has been home to the most extreme
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economic growth in human history
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in four short decades the nation has
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gone from a struggling backwater filled
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with poverty
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to this a nation of glistening
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skyscrapers and more gucci stores than
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you can poke a stick at
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the driver of this growth has obviously
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been its embrace of the free market and
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opening itself up to international trade
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the nation has always had huge potential
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given that historically
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for 1900 out of the last 2000 years it
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has been the largest economy on earth
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but now it is finally realizing this
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potential once again
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seeing this sustained growth people are
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obviously keen to jump on board
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millions of dollars have been made by
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millions of people and any logical
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investor would be foolish to not have
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exposure
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to the largest growth market in the
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world right i spend a fair amount of
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time chatting to channel viewers on
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discord patreon and even in the comments
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section of the video and it's probably
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one of the questions i see the most
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mr economics man how can i invest in
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chinese company stock
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now i don't want to sound rude and i
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promise i absolutely mean this in the
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nicest possible way
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but if you have to ask someone on
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youtube how you can invest in chinese
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equities
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you absolutely should not at all be
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investing in chinese equities
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in fact even for more seasoned investors
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the market for chinese companies is not
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exactly the promised land of
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double-digit annual returns you might
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think it is
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this is because there are a few major
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problems that have yet to be overcome
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the stock market in china is both too
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regulated and not regulated enough
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which sounds silly but let's explore it
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by looking at this piece by piece
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how is the chinese stock market
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over-regulated how is the chinese stock
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market under-regulated
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and why does this mean that most
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investors probably shouldn't be
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investing in these markets
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and all right all right if after all of
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this you are still interested in
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learning how to actually buy shares in
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china
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i will show you how but don't say i
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didn't tell you so
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this episode of economics explained and
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all episodes like it on
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spicier less advertiser-friendly content
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would not have been possible if it
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wasn't for our amazing supporters on
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patreon
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please consider supporting the channel
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so we can continue to cover exciting
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topics like these
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while also gaining access to a range of
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really cool benefits like our exclusive
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q a's which are held every saturday
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so head on over to patreon.com economics
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explained
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now some people may not know this but
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the various stock exchanges around the
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world are mostly non-government
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companies
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something like the new york stock
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exchange for example which is by far and
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away the largest exchange in the world
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is just a regular old company they are
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just a marketplace provider similar in
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many ways to
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ebay only instead of facilitating the
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exchange of unwanted christmas gifts
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they facilitate the exchange of shares
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in publicly listed companies
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companies like the new york stock
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exchange actually do a really good job
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of looking like a federal entity
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they work in an old historic building
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plastered with american flags
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reminiscent of any other government
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building in dc but they are not
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they are a regular company the same as
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any other
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the new york stock exchange in
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particular is actually owned by
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another company called intercontinental
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exchange or
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ice for short but to be honest they have
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become less and less fond of that
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abbreviation over the years
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intercontinental exchange actually owns
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similar stock markets all over the world
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which gives listing companies the
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ability to be traded on more exchanges
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than just the one that sits on wall
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street in new york
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what this means is that you can actually
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buy shares in the new york stock
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exchange
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as well as buy shares on the new york
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stock exchange and guess where you can
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buy shares in the new york stock
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exchange
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that's right on the new york stock
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exchange confused
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good because to be honest the whole
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process is actually far
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more simple in the chinese markets there
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are two dominant stock exchanges in
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china
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the shanghai stock exchange and the
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shenzhen stock exchange
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these two markets actually draw an
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interesting parallel between the new
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york stock exchange and the nasdaq
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respectively
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in that one is a fair bit larger but
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tends to list stocks in more established
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industries
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and the other is slightly smaller but
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has a larger listing of up and
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entities like tech companies it also
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must be noted that the shenzhen stock
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exchange
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is both geographically and financially
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very close to the hong kong stock
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exchange
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now the big difference between these two
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mainland exchanges and their western
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contemporaries is that they are owned by
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the government
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the shanghai stock exchange is a
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government agency just the same as the
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tax department or the military
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given that china is at least in theory a
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communist state
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the government sees the exchange of
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stocks as a public service that they
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will handle
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now this causes a few key issues for
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starters
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it means that the government has control
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over what companies get listed and what
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companies do not
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in a perfectly fair and impartial system
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this wouldn't necessarily be an issue
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but in this particular market it might
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be
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the other problem it causes is that the
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barriers to entry are just more
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difficult to get through
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there are a long list of requirements to
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be a publicly listed company
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above and beyond the normal requirements
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of a privately owned company
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this is true even in the united states
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these requirements will be broken up
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into requirements from the federal
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government
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and requirements of the exchange
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normally to meet all of these
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requirements the businesses that have
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been listed will employ the help of an
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institution
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like an investment bank who will also
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help to ensure the process goes smoothly
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as well as underwriting the deal if it
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does not what this means is that there
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are multiple entities involved that
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stand to make
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profit the investment bank and the stock
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exchange are all directly compensated by
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how many listings they can get on board
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in china this isn't really the case the
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exchanges are funded by the government
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so
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if a business doesn't get listed or it
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takes four years for it to reach ipo
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well well the same sorts of limitations
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are true for when a company does
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actually manage to get listed
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rules around things like ownership
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structures reporting standards and who
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can buy the shares
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are very limited for example buying
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shares directly as a foreign investor is
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not allowed without significant vetting
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and even if this does get approved
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you are limited in your selection for
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example i
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mr economics man i'm an australian
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citizen if i wanted to invest directly
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into an american company
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no problem i just contact my brokerage
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and tell them to buy apple or amazon or
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bank of america or whatever
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it's just as easy if not easier than
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buying shares on the australian stock
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exchange
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now if i wanted to buy shares directly
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on the shanghai stock exchange
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that's a very different story chances
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are
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99 of you watching would not be eligible
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at all
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because you need to meet at least one of
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these criteria
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have a permanent china residence card be
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an employee of a listed company and be
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participating in that company's equity
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incentives i've seen your foreign
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executives that get paid in bonuses and
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stock options
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work in china or be the owner of a
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corporation with operations globally
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as well as within china and for those of
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you that meet that last standard how you
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doing
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patreon.com even if you do meet these
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criteria
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you have to go through a robust
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background check and you are only able
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to buy
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non-voting shares in the company meaning
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that you will share in profits and
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capital appreciation
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but you can't vote on company decisions
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like who sits on the board of directors
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china really does not want any foreign
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influence in their major corporations
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for those of you who don't meet this
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criteria well you're out of luck
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sort of but don't worry there is still a
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way i promise
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anyway these severe limitations mean
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that these exchanges are
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not great at raising capital which is in
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essence what stock exchanges were made
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for
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because of this you will find that the
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largest listed corporations are mostly
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state-owned corporations
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that have a small share of equity
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something like
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10 owned by the general public with the
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rest of it been owned by the state
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since these corporations have other
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objectives besides simply being profit
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generators
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their performance is a less than amazing
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or certainly less amazing than you would
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expect from a nation with such strong
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growth
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we have said it many times before on
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this channel that the stock market
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does not equal the economy and almost
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any time we have said it it has been
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because the stock market has been doing
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really well
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while the wider economy has been doing
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really poorly in china
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it's almost the opposite due to these
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limitations you will find that even most
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chinese investors
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don't dabble as heavily in the stock
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market as their western peers
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preferring instead to accumulate real
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estate but that's a topic for another
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video
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spoiler alert you probably shouldn't buy
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real estate in china
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either now weirdly enough this
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over-regulation has caused a major
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problem
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with under regulation businesses need
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funding that's how they grow and expand
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and conduct research and development
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it's why the stock market exists before
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shares
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people couldn't invest into businesses
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without being a partner in that business
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which meant that they were liable for
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the issues in the business
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if the business gets sued or can't pay
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its loans it might be the investor's
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house on the line
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needless to say this wasn't very popular
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and it meant that some ventures just
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didn't get the funding they need to get
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off the ground
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the same is true in china and there are
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all manner of companies operating in the
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nation that want funding to expand
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but will find it difficult to get listed
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on the chinese stock exchanges
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so what are they to do well list on
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another stock exchange obviously
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historically the hong kong stock
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exchange has been a very popular choice
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for this
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given its close proximity to mainland
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china as well as its distinction as a
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separate economic entity
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but as most of you will know the
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distinction between the regions has been
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blurring more and more every day because
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of this
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more and more companies have been
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looking to places like the new york
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stock exchange
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which has actively been encouraging this
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participation remember the new york
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stock exchange is a company
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they want to get listings so that they
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can get paid
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this causes some other issues for
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potential investors
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cooking the books or reporting financial
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figures that are factually
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untrue has been a major problem for
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these companies
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now the listing process in any given
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exchange is supposed to account for this
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typically the exchange and the
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underwriter they go through to get
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listed would be liable for any
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misinformation that goes into an
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offering
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so both of these institutions do
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thorough audits before
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anything makes it to the trading floor
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however there is a
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sneaky backdoor solution available to
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companies that may or
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may not be completely honest operations
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a reverse merger is when a private
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unlisted company
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buys up control of a publicly listed
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company and then merges into one
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to make one big publicly listed company
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so if you were a devious and potentially
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fraudulent businessman that wanted to
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take advantage of the hype surrounding
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the chinese economic miracle
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this is what you would do create a
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business in china
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doing anything or nothing at all it
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really doesn't matter
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nobody's going to check just make sure
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that you have a legit looking warehouse
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and a website that checks out
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then get your account and to start
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generating reports that look like the
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business is receiving massive revenues
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and making massive profits keep this up
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for a few years and then you move on to
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the reverse merger stage
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at this point you find a company that is
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listed on an exchange that you want to
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take advantage of
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in this case let's say you go on big and
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go after the holy grail the new york
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stock exchange
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you are going to want to find some small
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company with a low market capitalization
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maybe some old sickly business in an
[667]
irrelevant industry
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let's call it dunder mifflin now some
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companies like dunder mifflin here can
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have a market capitalization
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as low as 25 million dollars which is
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obviously a lot
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but to complete a merger the dubious
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businessman only needs a controlling
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interest in the company
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so it's possible to get away with as
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little as 51 percent
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once this company is acquired the two
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will merge to form a new entity that
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will maintain its listing on the new
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york stock exchange
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at this point the previous public
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business can be completely
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liquidated anything that was previously
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owned will be sold off to try and recoup
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some of that 12 million dollars
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and depending on what the business had
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in terms of real estate inventory and
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hardware
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this could actually earn back a good
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majority of this cash
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once this is done the business may
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change its name to reflect something
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more reminiscent of a chinese company
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let's call it the totally legit
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manufacturing company of china
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cool then it can be promoted to new
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investors as a way to directly get into
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an up-and-coming chinese operation
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without having to jump through all the
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hoops of investing through something
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like the shanghai stock exchange
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some investors might still be wary but
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that's okay
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you can just pay off some public figure
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like bill clinton to speak about the
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growth of the chinese market
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and yes this actually happened with this
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unsuspecting investors will start
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pouring money into the stock and now
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it's finally time to capitalize
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you can do this in two ways the first is
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that you take
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all of this invested capital and use it
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to pay yourself a massive salary as the
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ceo
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or use it to pay another business that
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you own as a consulting expense
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the second way is just to sell off your
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own shares on the public market
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once they have appreciated to a nice
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healthy valuation
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a good dodgy businessman will do some
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combination of both of these
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now you might be asking yourself well
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isn't this illegal
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and yep it absolutely is but typically
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the people involved in pulling off these
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operations have connections that will
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see that they
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never see punishment for these types of
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actions or if worse comes to worse they
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can always launder their money out
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following the steps in our video here
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sounds great right now i bet you're
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asking yourself how do i invest
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well there are a few ways to get
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exposure to chinese companies
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the first is of course to go into
[793]
business directly with a business
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partner in china
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this is again highly risky but it's
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obviously the most direct method
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the second is to buy up companies listed
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in exchanges outside of mainland china
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businesses like alibaba tencent and
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xiaomi all have listings on
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international exchanges
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in order to attract wider funding and
[814]
finally
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you can get access to stocks traded
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exclusively on chinese exchanges by
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using an exchange traded fund or etf
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this is basically just buying up a
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security which will in turn buy up
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shares on the chinese exchanges
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through a company that has been green
[829]
lit by the chinese government
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high shares through blackrock has this
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on the nasdaq listed under the ticker
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mchi and there are plenty of other
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examples out there
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but here's the last word of caution yes
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china has seen amazing growth and it
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will no doubt continue to grow
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into the future i can see that you can
[847]
see that
[847]
and any other investor out there can
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also see that this means that the
[851]
anticipation of future growth in the
[853]
economy
[854]
has already been priced into these
[856]
shares
[857]
that's why the performance of even these
[858]
well-managed indexes
[860]
has been good but not quite as
[862]
mind-blowing as the rest of the economy
[865]
hi guys i hope you enjoyed the latest
[867]
video if you did please consider liking
[869]
and subscribing
[870]
this video is made possible by our
[871]
patrons over on patreon so if you enjoy
[873]
this video please consider supporting
[875]
the channel
[875]
like these awesome people did thanks
[878]
guys bye
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