Quants Think Like Amateurs in China’s Wild Stock Market | Hacker News Reader

Quants Think Like Amateurs in China’s Wild Stock Market

bloomberg.com

110 pointsjbredeche66 comments

Also because the Chinese government has direct control over the stock market, and can make arbitrary changes at any time. Makes things pretty difficult when the entire market is literally just a giant chop shop.

It amazes me that any Chinese investor would willingly invest in the market to be honest, but I suppose that’s why alternative investments like housing/cryptocurrencies are so popular.

Even if the prices of the assets themselves are manipulated, if you have a buy-and-hold mentality and invest in companies with strong earnings, I think it's still rational to invest.

If you think the price of an asset is maybe 100% higher than it should be, but it has a current P/E ratio of 20, it's theoretically better than making no investment at all if you hold it for 10 years (not accounting for tax or how the earnings are distributed, and assuming constant real earnings). If all the stocks available to you are like that, and your only other non-shady investment options are an already terribly inflated housing market, I think it's still rational. There's also no guarantee that the bubble will even pop in 10 years. The best case scenario for overvalued equities is that they deflate at a rate somewhat lower than real growth - in that case, you see yoy growth in the traded price of the asset while the asset prices move towards more reasonable prices.

But that's the rub. How can you tell which companies actually have strong earnings? Anecdotal evidence suggests that mainland Chinese companies frequently falsify financial reports, and auditing standards are weak.

If you are going to invest in Chinese companies at least do the bare minimum of ensuring that accounts are signed off on by the Hong Kong offices of the Big 4 accounting firms. The mainland offices are not equivalent.

>If all the stocks available to you are like that, and your only other non-shady investment options or an already terribly inflated housing market

They don't have access to developed market (ex china) ETFs?

China has some sort of capital control system (meaning, it is hard to move money out of China legally), someone can probably explain it much better than me.

I am guessing it is enforced by the fact that the Chinese and non-Chinese banking systems are not very well linked, so anybody trying to move large amounts of CNY out of the country will show up on someone's radar. I know a lot of Chinese people use casinos as a way to make their money "go dark" so they can move cash out / exchange their cash for things they don't want their government to know about

i can imagine that exporting goods is also a good way to "launder" money. Purchase manufactured goods and ship 'em overseas, and receive US dollars in return, in a non-chinese bank account.

> Purchase manufactured goods and ship 'em overseas, and receive US dollars in return, in a non-chinese bank account

That is such a great way to defeat currency controls that I wonder what the Chinese government--or any government with currency controls--could do about it. It seems like you could move infinite money out of a country that way with almost no risk. It's not smuggling. If it's done legally, you'd declare your sales and pay tax on your profits, but still end up with a pile of cash outside of your home country.

Off the top of my head, I suppose they could crack down on it by:

* cutting off all trade (obviously a stupid thing to do)

* making it illegal for their citizens to have foreign bank accounts

* require that all exports go through government-controlled agencies who would ensure that payments don't end up in foreign bank accounts

* requiring all payments received in a foreign country to be repatriated back to the home country

What does China (or any government with currency controls) do?

Why would the government want to stop this?

Most small business in China happens without being taxed. It is fairly trivial to get money into China but harder to get it out of China. From memory, Chinese people can exchange about $10,000 USD per year which is more than the average income here. If you need more than just ask your friend and buy them dinner. (we didn't have enough paperwork to exchange our bonus from RMB to AUD when I left the country. I had two Chinese friends help me since they didn't need any paperwork to exchange money)

The limits are more at a company level than at an individual level.

That being said where would you keep the money as a Chinese national? In the USA where the US government might take it and then throw you in jail when you collect it (Huawei CFO)? Most other countries work with the USA so they are not a lot safer.

The Chinese tax system is mostly "prepaid" so the government gets there tax either way...

This is also exactly what a lot of companies do and you can buy overseas money from these people.

>In the USA where the US government might take it and then throw you in jail when you collect it (Huawei CFO)?

If you're not operating a front company to evade US trade sanctions, you should be fine.

Which would make sense if they were going after the US companies that did the same thing...

Hmm... they've decided not to follow any of those leads even though they did the same thing? Interesting...

You could just audit the hell out of people who consistently lose money (e.g. expenditures without any declared income).

If someone's doing that for multiple years, they deserve a microscope.

i believe that the last 2 points are what is required by the chinese gov't (iirc). But if you're operation is small, i m not sure if there's enough checks and you can slip thru!

And you could make a deal with the overseas buyer to give you half the money on one account, and the other half under the table/off the books. Then repatriation becomes just another cost of doing business.

Not when they are spending RMB. Since the RMB isn’t fully convertible, this is a hard barrier for many.

The dirty little secret is that trading on insider information is absolutely rife in the Chinese market among anyone who's above the bottom few rungs of society.

Is it really different in the US stock market?

Sure, it may not be quite as corrupt. But insider trading is the standard for those non-peons out there trading with big bucks.

You can just look at the average returns of the non-peons to see that they're unlikely to be using insider trading.

When I was at university, a meaningful percentage of my Chinese classmates' parents had paid for their expensive overseas tuition by making 'informed' investments in the stock market, and thought nothing of it. Bribery and insider trading (stock tips are effectively one form of bribery) are absolutely the standard in China.

Parent didn’t mention anything about the aspect being binary. You can inside trade in the USA, and unless you are a member of Congress, the SEC will likely go after you (eventually). So people don’t do it with anywhere near as much impunity as it is done in China.

Sure, it may not be quite as corrupt.

You answered yourself. It's a matter of how widespread it is.

That makes their market more like a casino, with a house in control. Unlike a casino, the house is not precisely fixing numbers, but doing it dynamically, with elements of chaos and predictability—what will the gov't do next? I imagine that would make the Chinese market a lot of fun for gamblers.

I can't say that's too different from Trump tweets acting directly on the US markets. Though to a lesser extent.

Here is a hypothesis: Top investors are hands in hand with the government and it's a way to transfer money from the who are farther away or in opposition to the government to those closer to government and this enables them to have a control over the market forces and keep control in the center whereas small time investors are just gambling based on hopes and speculations. Sometime they make money while other times they are wipped off.

And still a lot of funds will invest on the HK market as its much more trusted that the main market.

The question for a real investor in a stock market is, is it going up or down over a 10 year period or if it's a company the same thing applies in a period of 10 years is it going up or down. Outside of that in any stock market you are gambling.

Even if you take the long view, I’m not sure how much faith you can really put into the Chinese market. Authoritarian governments as shown by past history, don’t have a great track record for long term stability unfortunately.

Who knows though, maybe the Chinese government will manage to make a smooth transition towards a more democratic system without the violent revolutions that previous incarnations have had to deal with respectively.

Now is probably a critical moment in determining whether such a future scenario is realistic, considering the slowing economic growth of China and the need to transition towards a service oriented rather than manufacturing based economy. Economic recession is usually one of the first steps towards civilian revolt in authoritarian regimes.

Most governments in history were authoritarian and many were stable for hundreds of years. With modern technology, I don’t see why authoritarian governments are necessarily more vulnerable than democratic ones.

> Most governments in history were authoritarian and many were stable for hundreds of years.

There are currently two state level organisations over 1,000 years old, Japan’s Chrysanthemum Throne, aka the Imperial Household and the Holy See or Papacy. The only other state to break 1,000 years I’m aware of was the Most Serene Republic of Venice. State continuity is an extremely hard problem, and I don’t see much evidence that monarchies were stable. Succession disputes and civil wars are really common in republics, monarchies, empires, everything. Democracy’s virtue is in simulating a civil war by counting heads and facilitating an orderly and peaceful transfer of power between groups that detest each other. When the hate gets too much then you get a civil war.

Authoritarian governments have the problem that the Western bloc is implacably opposed to their existence and will take any opportunity to extinguish them. Look at what happened to Libya after Qaddafi cooperated and dismantled the chemical weapons programme and did that help him? Hell no. Hilary Clinton gloated over his death after she persuaded Obama to destroy the only Libya.

This is not the only time the US has opted to spread its values at the expense of countries that had no quarrel with it. The US sent the Flying Tigers to Burma well before Pearl Harbor, and knew perfectly well that the oil blockade of Japan was an existential threat to the Empire of Japan. Likewise the US got into WWI and WWII because it wanted to. The US was shipping aid and supplies to the U.K. The sibling of the Lusitania was hardly an unforeseen consequence of supporting one side in a war.

China is well aware of this, or at least the Politburo and the rest of the top level cadres in Zhongnanhai are. The West is inimical to their existence. Ditto the North Korean leadership. The US is totally untrustworthy as far as they’re concerned.

More broadly apart from the Holy See and Chrysanthemum Throne the countries that have gone the longest with continuity of government and sovereignty are the USA and U.K. The US is due for another civil war, people certainly hate each other enough and the UK’s claims to governmental continuity have a huge asterisk called the Glorious Revolution or Dutch invasion.

> There are currently two state level organisations over 1,000 years old, Japan’s Chrysanthemum Throne, aka the Imperial Household and the Holy See or Papacy.

The Holy See hasn't actually been either stable or a state level organization continuously for the last thousand years.

When wasn’t it? During the Avignon captivity it was at least as powerful as now. Between Italian unification and the Lateran Pact it had diplomats with the customary immunity, embassies and ability to make treaties. The Holy See has had rival claimants since 1,000 but the current pontiff derives in a direct line from that of 1,000 AD just as the current British government has a rock solid claim to continuity since the Glorious Revolution.

> When wasn’t it?

Well, it didn't even become a “state level organization” until the temporal dominions of the papacy became separate from the Holy Roman Empire in 1177, so even if you ignore both times the papal states were disestablished, it doesn't reach 1000 years.

> The Holy See has had rival claimants since 1,000 but the current pontiff derives in a direct line from that of 1,000 AD

Only in the sense that a convention later grew of describing a particular line through the period of two and then three competing lines of popes that were ended with a common replacement as “the” line of popes, but that's an after-the-fact rationalization, not actual continuity.

That’s sort of a bad argument though isn’t it? There’s a reason why those governments no longer exist. FYI, a fall towards authoritarianism being a key factor to an ultimate collapse.

Being authoritarian from the beginning just makes you start that much closer to edge.

or authoritarian gov't but with competent bureaucrats and significant drop in corruption and bribery could in fact, be more stable than a democratic society.

The problem with that “strongman” autocrat ruler kind of thinking is that, while in the short term it can bring benefits, it’s ultimately unsustainable precisely because people don’t live forever and you can’t guarantee that your successors will be as competent or intelligent.

The bugs with authoritarianism reveal themselves at this point, as the wide powers given to the aforementioned incompetent people in power results in extremely bad decisions being made, ultimately leading to a degradation in society and either collapse or a coup. Such a cycle is extremely unstable, and it only takes a brief glance at history to see the results for yourself.

There’s a reason why in today’s world, empires and monarchies have been replaced by republics with systems of checks and balances that are put in place specifically to avoid these effects.

How could an autoritarian society could not be corrupt ? When knowing the right person (the auritarian leader or any of its men) give greater wealth than being efficient ?

pretty arrogant statement there, buddy - decreeing what a real investor is permitted to do. There are many things happening on the stock market on many timescales and the participants would definitely not consider themselves gamblers.

You're not wrong, but holding for shorter time scales is typically called 'trading', whereas 'investing' is holding for several years or more.

There are lots of other Q's too:

- Am I just being prospective and intentionally introducing some contained risk to my financial plan (fine)

- Am I doing this for entertainment (fine)

- Is this for learning purposes (fine)

- Did I just get a tip which is near-insider or insider-quality (well...party politics can lead to this)

So, some gambling can be bad in some sense sure, but not necessarily if informed by various conditions or analyses. A big part of HN psychology skews toward low financial risk + low tolerance for nuanced financial thinking so I thought I'd mention that.

Well, ASHR's price has changed by about 0% between Nov 2013 and Feb 2019, and by about 10% to this day. It was also +125% at some point. So even in the long run investing in diversified top-of-the-country-stock-market ETFs may be "just a gamble".

Berkshire Hathaway invested heavily in BYD because there aren't enough opportunities in the US.

BH invests in a lot of companies worldwide, investing in just US companies would be stupid from a diversification point of view.

They don't do it to diversify.

https://finance.yahoo.com/quote/300431.SZ/

A third tier media player software company with an antique main product when listed, reached a high of 327 rmb in three months, then the company started it's VR glasses business.

https://finance.yahoo.com/quote/300104.SZ/

LeEco, founder absconded to the US, about to sink his FaradayFuture too.

https://www.bloomberg.com/news/articles/2019-04-30/kangmei-s...

Oops, 30 billion rmb profit in cash accounting error boys.

https://www.google.com/search?q=600485.sh Yes that guy who trumpeted to actually dig The Nicaraguan Canal. Trading suspended ever since December 2016, when a news report accuses its main business, telecom in Cambodia which rocked a 80%+ net profit margin, is a fraud. It seems no one dares to mess with this company right now, rumored to have deep military connections.

If developing profitable trading approaches based on message board and social media sentiment, will it work outside of China in those markets where small investors and day traders dominate - penny stocks, certain cryptocurrencies, etc.?

Yes - in fact many people do this regularly...for instance, identifying and shorting pump and dumps (usually popular penny stocks).

My favourite part of this article:

"He became interested in the challenge in part because of some quirky moves in Chinese stocks in the wake of the 2016 U.S. presidential election."

"When the result became clear, a listed Chinese company whose name sounds like “Trump Wins Big’’ in Mandarin surged, while a firm that sounds like “Aunt Hillary’’ slumped."

i had to read that a couple of times to understand the implications, are people really that dumb?

Not all that surprising. A couple years ago a company called Long Island Ice Tea Corp. changed their name to Long Island Blockchain and their stock shot up 289%.

https://www.bloomberg.com/news/articles/2017-12-21/crypto-cr...

I remember reading about a company's shares rising by like 400% after it added "blockchain" to its name. Rational agents are going to do rational things all over the world /s.

It's completely rational to buy a stock if you think other ppl are going to be irrational and make the price surge.

I have an image of highly rational traders sitting in high pressure meetings coming up with stupid ideas so that they can front-run stupid people.

What if you think everyone else is rational, but they'll all buy the stock for the same reason as you? It's an entirely rational system that leads to a completely irrational outcome.

Sounds like a keynesian stupid contest.

For people who don't know the reference: https://en.wikipedia.org/wiki/Keynesian_beauty_contest

Given some investors mistook penny stock ZOOM Technologies for Zoom video conferencing, yes, they really can be.

https://www.ccn.com/zoom-ipo-stupid-investors-made-unrelated...

Or maybe no one mistook it and they were buying because they thought other people did.

Yes, and it's a worldwide phenomena. Embedded in this link is Thaler (A Nobel winner) using such an example as a counterexample to one view of the efficient markets hypothesis: https://ftalphaville.ft.com/2017/10/09/2194613/thaler-the-cu...

tl;dr price for the "CUBA fund" spikes following Obama announcement of normalizing relations, despite the CUBA fund having nothing at all to do with CUBA.

What might be called the "homophone superstition" aspect of it is (apparently?) bigger in Chinese culture than in other language cultures, though.

http://www.nautil.us/issue/44/luck/is-the-chinese-language-a...

The efficient markets hypothesis seems Really Fucking Dumb™ to me. Like, trivially nonsense.

If you see EMH as a general principle: all present information is incorporated in the price and all Sharpe ratios trend to the market Sharpe ratio, it makes more sense.

No one actually believes in strong EMH, that is, it’s impossible to beat the market Sharpe ratio.

The EMH isn't necessarily that every stock is perfectly priced. It's that it's not possible to reliably predict where prices will go next.

But isn't the hypothesis that it's not possible to predict because it's perfectly priced already?

Not going to sign up to read that article, so apologies if this is off base or duplicative of what's in the article.

But, automated sentiment analysis gone wrong maybe? Bots see a bunch of negative things with "cuba" in it on twitter/the news and decide that cuba the fund is in trouble.

The excerpt is from this SSRN preprint, section III: https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2790606

The fund went up not down. That aside, I believe the point is that if a bot goes and does that, it is simply doing what a human told it to do; bots reflect the commands of their human masters in an environment (financial markets) created by and for human endeavors. Hiding behind "bots" is not a way to get insight into mechanics of how markets (mal)function, IMO.

Well sure, but (under my thoery) the humans rationally decided to use automated sentiment analysis, knowing that there is a error rate, but finding that it is low enough that they can make money. This just happened to be one of those errors. And substitute negative sentiment for positive sentiment in my original post to match the direction of stock movement.

Thanks for the direct link!

a few folks like to use examples like this (and those in the replies here) as examples of auto-trading, actually.

someone noted that every time the actress anne hathaway trends on twitter, the price of warren buffet's berkshire hathaway goes up.

To use the title of Dan Ariely's book: Predictably Irrational

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