Shenzhen-listed stock increases by 10% each day | Hacker News Reader

Shenzhen-listed stock increases by 10% each day

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It's a hugely underpriced IPO in a bubble (Tech stocks average P/E is over 100). +/- 10% is the price limit in Chinese stock markets.

So rather than having a price jump, this stock continues going up with little volume, until the "real market price" is reached.

Edit: It's oversubscribed by almost 300 times. http://mobile.reuters.com/article/idUSL3N0WI22B20150316?irpc...

Just how undervalued could it be with a market cap of 13.37 billion yuan ($2.15 billion)? And it appears to have been going up 10% daily since March 27 when it launched (it's up over 1000% already).

And if it was so incredibly underpriced... why was it so underpriced?

Who is buying it, by the way? What is the probable source of their money?

Anyone and everyone. Real estate investment has bottomed out, now Chinese cash is being funneled into the Shenzhen Stock Exchange.

Lots of free money flowing around in China, they're sniffing in the US too. Investment in Chinese tech companies is booming at a rate that dwarfs the dot-com bubble.

There is currently a margin (leverage) bubble in China. It will not end pretty.

the 500B-USD$ question is "When will it pop?"

From http://www.bloomberg.com/news/articles/2015-04-07/u-s-dot-co...

The use of margin debt to trade mainland shares has climbed to all-time highs, while investors are opening stock accounts at a record pace. More than two-thirds of new investors have never attended or graduated from high school, according to a survey by China’s Southwestern University of Finance and Economics.

Because the IPO prices in China are heavily regulated. Tech companies often raise little money in an IPO because it will always be significantly underpriced (generally 100%-300%).

The authorities will make sure your IPO is oversubscribed by at least 50 times to protect the investors, or they will not approve the IPO.

Weird considering the rationale they gave for approving this last batch of IPO's: "a move which could cool a stock market rally that has seen the benchmark blue-chip index surge 13 percent since the start of this year."

http://www.reuters.com/article/2015/04/03/us-china-ipo-idUSK...

Not contradictory at all. Because IPO is such a lucrative investment, each round of IPOs can draw as much as several trillion CNY. This amount of money would have to be withdrawn from the stock market to "cool it down".

If the profit is guaranteed (which it seems like, with the government restrictions), investment firms should be able to simply borrow the money to buy the newly issued shares.

Yes, and it's exactly what's happening. There's no market inefficiency here. During the few days when IPOs are available, the overnight interbank interest rates usually increase significantly compared to other days. On average you can expect to make about 10% p.a. almost-risk-free from IPOs, similar to gearing A-grade corporate bonds.

In a restricted environment like this one, it seems like there must be big actively-traded dark pools lurking somewhere. Do they exist?

Edit: By dark pool in this context I might mean "black market"

No. There is off-market bulk settlement, but it's under the same pricing restrictions.

The volume is still 78mm CNY ($12.6mm) a day. Why would anyone be selling?

Because if it tanks, it will likely go to -10% instantly, making it really hard to sell. The thing about price restrictions is that you can never be sure what the real market price is because no one has the information, especially in a bubble.

Most of the volume happens around market opening, because at that time no one is sure whether the stock will end the +10% strike that day.

If you want to sell at an all-time-high, you would have to risk losing out to sell at one of the +10% days.

Is there a US-based broker that can trade this stock?

This stock is listed on ChiNext, which is currently not available to foreign investors.

But you can always invest in NQ mobile. Another winner?

see this article for well-written explanation: http://www.bloombergview.com/articles/2015-05-01/risky-debt-...

Ummm so how does one in the USA buy a Shenzhen-listed stock? I can't exactly buy it from my fidelity.com account now, can I?

Make good friends with someone high up in the Chinese government? What would be the point of fixing the price if you then gave all the money away?

You are probably restricted to HK exchanges.

No, you can't. Some Shanghai-listed stocks you can buy through the recently opened Hong Kong-Shanghai Connect. But those are mostly well established companies that are listed in Shanghai. You can read more about it here: http://www.hkex.com.hk/eng/csm/chinaConnect.asp?LangCode=en

It does seem that if there's no way to buy from the USA that there's a hell of a business opportunity there. I know nothing about this, but if that gap exists and anyone wants to work on the problem together... let's do this?

I work in this space, the only way to get exposure to these is via equity swap using a QFII's capital. I.e. you must be a foreign institutional investor with an existing relationship to a QFII. Retail flow is not supported :) (although thats kind of what north bound stock connect is for).

I know a shoe-shine boy who said he can help. It's a sure thing.

The business opportunity exists in helping mainland investors move their money outside China.

Matching those that want to invest in China and those moving their money outside happens already, mainly via internet banking exchange of passwords and sufficient trust in the middle-man. It is legal (it is not legal to swap passwords, this is a simplification, but the crux of it), but an authorized exchange of ownership of back accounts.

You can't not buy Shenzhen stocks unless you know some Chinese friends who can buy it for you under his name.

But if you are not trying to buy a specific stock, but just wants to invest on Chinese stock markets, you can buy mutual funds or ETFs managed by QFII(Qualified Foreign Institutional Investors) companies which invest on Chinese stocks. You can find some by googling.

Before buying, you can check their holdings to make sure it invests on Chinese stocks rather than Chinese companies in NYSE or NASDAQ. Ticker symbol for stocks listed on exchanges in Mainland China is 6 digits (no letters). A shares on Shenzhen begins with 300(for ChiNext), or 00. Code for A shares on Shanghai begins with 600. And for B shares（must be exchanged using foreign currency), it begins with 900. H shares is listed on Hong Kong not Mainland China, so you can buy H shares by opening an account in Hong Kong exchanges. You can also check whether the fund price and the indexes it claims to track change simultaneously.

And rumors say Chinese government will announce Shenzhen-HongKong connect in H2 this year, but I doubt ChiNext(where Baofeng is listed on) will be open to foreigners.

If you do buy an ETF, make sure they are not synthetic ETFs that are really buying swaps rather than stock. The tend to be quite expensive for retail investors.

It's odd that no one mentioned that they are makers of successful VR glasses: http://www.baofengmojing.cn

I am amazed how quickly VR is taking of. This must be the 10nth manufacturer using the same concept.

What's going on here?

It can't go up any faster due to Chinese regulations

i guess its called "circuit breaker" in stock market terms.

No, that is a mechanism to stop trading after a certain dip in the price.

circuit breakers are there both on upside and downside. Circuit breaker is being triggered everyday at the start of the day

US futures exchange has "lock limit" circuit breakers in both directions. It's not uncommon. Remember, a large share of market participants is playing from the short side. Up is down, down is up, it's all the same.

Do they limit demand or fix (cap) the price it can be sold for artificially? I imagine everyone would flock to buy the stock.

Beyond that, why did the stock IPO at such a low rate? All that's mentioned is the price increase being limited, i.e. limiting volatility. Not a great idea but, I can see how that works. But why did the stock start out so low in the first place?

The daily increase is capped at 10%. All else being equal, in the real world, the only way to limit demand is to raise the price - eventually it will reach it's actual market value. Until then, "demand" doesn't really have much meaning - it's essentially being rationed. What I don't understand is who's selling?

Who's selling? Well, imagine you wanted to sell your $300k ('market value') house on the market, as you needed liquidity. But the government says its price is capped at $25k. They enforce this by only letting notaries sign off on sales at that price.

Ownership of a house by law is only valid once a notary (government worker) signs off on the exchange of the deed, so nobody will buy the house without the notary's signature, as then they'd pay but not officially receive ownership. The seller who has the money, can now call the police and kick the buyer out of the house, as the buyer can't prove he owns the house as he never received the deed from a notary. So to sell, you must use a notary service, and through the notary, $25k is exchanged hands.

Now obviously nobody will sell $300k value at $25k, and obviously there are lots of home owners who at any point in time want liquidity and want to sell the house for whatever reason.

The most sensible thing to me is 1) not many are selling, even if 1 out of a million shares exchanges hands, whatever was the last price is the new price. So the 10% gain can happen with insignificant volume. And 2) some people are selling for $25k, while receiving $275k under the table through a different deal. It'd be discounted as you'd likely need to launder the money which has costs, but if the market price and the artificial price are far enough apart, people will do it.

Given the daily 10% increase, anyone selling would have to be desperate for cash and, simultaneously, a horrifyingly bad risk. A loan at significantly lower than 10% daily interest could probably be secured using the securities as collateral, so I don't think that's the explanation.

The selling may be to route around the price restrictions. If the mandated IPO price is $100, and the statutory maximum price change is +/-10% of the previous closing price per day, and the true market price of shares is $10,000.00, the procedure looks like this:

  Day 0: Buy 10000 shares at $100.
  Day 1: Ask $110.00 for 1 share.
  Day 2: Bid $121.00 for 1 share.
  Day 3: Ask $133.10 for 1 share.
  Day 4: Bid $146.41 for 1 share.
  .
  .
  .
  Day 48: Bid $9,701.72 for 1 share.
  Day 49: Ask $10,000.00 for 10000 shares.
  Day 50: Pay your patron tribute from the $98,994,971.
  Day 51: Start converting the remainder into foreign currency.

Following this patient strategy only costs you $5029, which ultimately goes to your trading accomplice, who bought your share on odd-numbered days and sold it back to you on even-numbered days. No black market transactions are required.

You could probably conspire with another party to sell your shares back and forth at +10% every day. That way the official market price of your shares would eventually get to the point where you could share them at their true value.

Nepotism.

IPO stocks are artificially rationed to maintain a daily 10% gain in order to control liquidity and reduce volatility -- and, more to the point, the IPO price is low for the benefit of investors.

In practice, only those with the best connections are able to participate in the daily trade quota rationing.

They got rid of most of the IPO pricing restrictions ages ago, now the primary driver is liquidity and margin lending, with official margined shares making up around 30% of the current free float and the Shenzhen market turning over its free float every 7 days (!). To put the margin in context, for the US market its around 3% of free float and you can margin 50-100%

ChiNext is on around 50x earnings now, most stocks above 5x PB. Could go further though, brokers only 2/3rds through their margin limit...

Love that Sharpe ratio!

Huh. TIL. http://www.investopedia.com/terms/s/sharperatio.asp

They make a great radio: http://www.amazon.com/BaoFeng-UV5R-Dual-Band-Two-Way-Radio/d... (cheap way to get into Ham).

wrong Baofeng, and wrong 'great Baofeng radio' :), the great one is b5 http://www.brickolore.com/2013/01/baofeng-uv-b5-best-kept-se...

NQ mobile--I still can't figure out what this stock does, or why the SEC has not delisted them. I think when it all blows, like always-- the big boys will have gotten out, and the little investor will have lost everything.

No wonder banks/investment houses are afraid of Elisabeth Warren? I feel she know what the future holds?

That reminds me I need to get my cd out of .10 percent this week. Yes, I am making .001 percent on my retirement. Homelessness--here I come! I'll even mention the wonderful bank that didn't inform me of the rate change--lovely Luther Burbank. "The bank that really keeps your info quiet!"

China stock market = casino

invest only what you are not afraid to lose

Unfortunately I think that is probably the attitude of the average Chinese trader---which is exactly why it turns out that way.

Not so different from the US stock market.

Mostly true if you trade short-term individual stocks. If you invest long term in indexes, it's still risky but much less than casino-style risky and losing all of it, short of total economy collapse in which case it wouldn't matter where you invested, pretty much never happens.

Is there any way to buy this on the open exchange?

I'd be interested to know as well. My brokerage only lets me trade on 10 exchanges.

China stocks is crazying in these days

Increases by 10% everyday? On the front page of HN? Show's over. Now look for the MMs to attract buyers as they short it on the way down for buco $$$.

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