What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing for the past century. The stock market has been perhaps the greatest single source of wealth creation in world history. Since 1993. The s p 500 has increased 962 percent for a compounded annual return of nine percent.

If you started investing one thousand dollars per month in the s p 500 28 years ago, that would have grown to more than 1.3 million dollars. For example, a vermont-based janitor by the name of ronald reed amassed an 8 million net worth simply by investing his excess income into the stock market over multiple decades. Pretty much anyone in the us can become a millionaire if they have the discipline to set aside a portion of their income every month to put into the stock market, but that's not true. In every country in china, the shanghai stock market index has been a major dog over the past couple decades.

Today is down almost 40 since its 2007 peak. Obviously, it's been very difficult for chinese citizens to build wealth in this environment during the same period of time. The size of the chinese economy has tripled from 5 trillion to 15 trillion. These numbers appear to contradict each other.

If the economy is rapidly, expanding companies should see their revenues and profits surge as well. So how can the economy triple in size while the same time? The stock market has fallen 40 percent. China's economy is very different than the us or other western nations because of currency controls. Most chinese citizens are forced to invest substantially all of their wealth domestically because of this.

Chinese asset markets are driven by liquidity and largely divorced from fundamentals. Furthermore, the domestic stock market is dominated by state-owned enterprises, and insider trading is pervasive. Both the chinese stock market and real estate market are largely driven by speculative boom bust cycles that usually see individual investors. On the losing side of the trades, the chinese government disadvantages individual investors by forcing them to invest in the overvalued and speculative chinese market.

Most of the high growth technology companies list outside of mainland china and are inaccessible to domestic investors. The chinese central bank implements a regime of rigid currency controls. For the most part, it is impossible for chinese citizens to convert significant amounts of their wealth to foreign currencies. This precludes them from investing in the stock markets of other countries.

The chinese government also bans foreigners from directly owning stakes in chinese companies, as they fear that this will give foreigners undue influence in their economy. That means that foreigners cannot buy stocks in the shanghai or shenzhen stock exchanges. Many chinese companies get around these rules by creating so-called variable interest entities registered in the cayman islands. So when you buy a share of alibaba on the new york stock exchange, you're technically buying a stake in a shell company with a po box in the cayman islands.

But this shell company is entitled to the profits that alibaba generates both of the major stock exchanges in china are owned by the government. The ipo process is very slow and full of red tape. Because of this, many chinese companies decide to listen to us or hong kong. This has led to strange situations where almost all of china's major tech giants are only accessible to foreign investors.

Alibaba tencent, baidu and jd.com are listed on the new york or hong kong stock exchanges. None of them are listed in mainland china. Anybody in the world can invest in the chinese tech giants, except for the chinese people. There are almost no innovative tech companies listed on the mainland chinese exchanges of the top 10 largest companies listed in the shanghai stock exchange.

Some of them are state-owned and they are heavily skewed towards old economy sectors like banks and oil companies, because the mainland stock indices are isolated from the rest of the world. Liquidity conditions and animal spirits within china can cause large speculative bubbles. There was one boom-bust cycle that ended with the global financial crisis of 2008. This is to be expected and mira's other stock markets around the world, but in 2015 there was another speculative bubble that inflated and deflated for no apparent reason, because mainland listed stocks are the only options for chinese investors, their prices get bid up very high.

This has led to some interesting market inefficiencies. Some chinese companies list their shares on both the hong kong and shanghai stock exchanges for these companies. Their mainland china listed shares traded at a 45 premium to their hong kong listed shares on average. For example, bank of china is one of china's largest state-owned commercial banks.

They list their shares on both the shanghai and hong kong stock exchanges. The top one is the hong kong listed, one which currently trades for 2.75 hong kong dollars, which is equivalent to 2.26 chinese yuan on the bottom, is a shanghai listing which trades for 3.04 chinese yuan or 34 premium. This is the exact same company with the exact same risk and reward profile. The hong kong listing trades at a price to earnings ratio of 3.3 and has an 8.6 dividend yield.

The shanghai listed one trades at a price to earnings of 4.4 and has a 6.5 dividend yield. Obviously, you would rather own the hong kong list of chairs, because you're buying the exact same company for a 34 discount. This means that your expected return on the stock will be 34 greater. The difference in price cannot be arbitraged away because short selling is heavily restricted in the mainland, and most domestic investors cannot convert their yuan into hong kong dollars.

Chinese citizens are, for the most part, forced to buy the relatively overvalued shares listed in mainland china. Another problem with china's stock market is insider trading, while it's technically illegal, many corporate executives and their friends can get away with it if they maintain good relationships with local government officials in 2018, professors from nanjing university and ucla published a paper where they analyzed the performance Of 1 million individual investors in china, they separated the traders by account size. The idea is that rich investors with large accounts are more likely to be wealthy businessmen with connections to corporate insiders. If they can consistently beat the market, this could indicate that they are taking advantage of non-public information that smaller investors don't have access to, and their results were stunning.

In the time period, they looked at the accounts in the bottom 50th percentile of size had an average annual return of negative two percent accounts between the 50th and 90th percentile had average returns of 1.4 accounts between the 90th and 99.5th percentile had returns of about 6.3 Percent and finally accounts above the 99.5 percentile had annual returns of 16.8 percent. Basically rich investors with large account sizes, massively outperformed smaller investors. It's possible that large investors are just better at trading and maybe that's how they got rich in the first place. But a seemingly much more likely explanation is that they had access to insider information.

The researchers found that the main way the large investors generated profits was buying shares of companies right before they announced a dividend increase. Such an announcement almost always causes the stock price to rise. They would then proceed to dump their shares after the announcements were made. Also, large investors tended to trade stocks of companies located within their region of residence.

This indicates that they might have friends at these companies who can tip them off before corporate announcements, such as dividend increases. Well, insider trading happens in all countries. It appears to be a much bigger problem in china as compared to western countries whose securities regulators tend to be more sophisticated and independent. Chinese investors don't really have many options to invest their money.

The domestic stock market is rigged by insiders and most of the high-growth tech companies are listed on foreign exchanges. The poor performance of the mainland stock market has pushed many investors to switch to real estate. This has caused real estate prices to explode relative to rent, as most individual investors are priced out of the market. The high prices have also caused developers such as evergrant to take on excessive amounts of leverage, while it's not great to be investor within china.

That doesn't necessarily mean that there is no opportunity in the chinese markets if you're a foreign investor. You have a clear advantage over domestic investors because you can buy stocks at cheaper prices on the hong kong stock exchange and many of them appear to have attractive valuations with a price earnings ratio of 3.3 and a dividend yield of almost nine percent. It's hard to argue that stocks like bank of china are overvalued, but if you ever do decide to invest in chinese stocks, it's probably better to buy and hold as opposed to actively trading the more often you trade, the more likely it is that you'll be exploited By insiders, alright guys that wraps it up for this video, what do you think about the chinese stock market? Do you own any chinese stocks? Let us know in the comments section below, if you enjoyed this content, make sure to hit the like button and subscribe. So you don't miss future uploads as always.

Thank you so much for watching and we'll see you in the next one wall, street millennial, signing.