Beijing (CNN)If you concerned this Beijing storage facility during the night it would be downright scary.
To have a shot at the global stock markets closest thing to a guaranteed windfall, youre going to need a really accurate clock.
Because with this trade, success has nothing to do with corporate fundamentals or technical patterns. Its all about timing, and fractions of a second can mean the difference between a 360 percent return or nothing at all.
They call the strategy hit stock in China. And its there, on the countrys most-active exchange in Shenzhen, that a unique mix of market rules and government intervention has turned newly-listed shares into huge winners for investors who place their bids at just the right moment.
In an otherwise lackluster year for Chinas equity market, the gains have helped fuel a technological arms race among local brokers eager to give their clients an advantage. Even after Shenzhens bourse tweaked its order system to level the playing field in June, enthusiasm for the hit stock trade shows little sign of letting up.
Its one of the few strategies thats consistently profitable, said Hao Hong, a strategist at Bocom International Holdings Co. in Hong Kong. Traders will try to find a way around the Shenzhen exchanges new settings.
To understand the strategy, it helps to start with how Chinese IPOs are priced before they begin trading. Unlike in the U.S. and Europe, where market forces play the deciding role, new offerings in China are subject to a regulatory ceiling on valuations. The cap was designed to protect individual investors, but has resulted in dramatically under-priced IPOs that surge once they hit the secondary market.
All of this years initial share sales in China have been valued at 23 times earnings or less, versus the median ratio of 68 for stocks in the Shenzhen Composite Index, according to data compiled by Bloomberg and China Finance Information Network. And every one of the 99 new listings in Shenzhen has climbed by the daily maximum on its trading debut.
The biggest returns go to those who invest at the initial offering stage. But in Chinas IPO lottery system, intense competition means the odds of actually winning an allocation are minuscule. Just 0.05 percent of orders were filled for the average Chinese IPO in 2016, according to CFIN.
For traders who come away empty-handed, the hit stock strategy offers a second chance.
The challenge is to buy before the mispricing disappears. In markets like the U.S. and Hong Kong, IPO discounts vanish quickly because theres no limit to how much shares can climb on the first trading day. Shake Shack Inc., for example, opened with a 124 percent gain in its New York debut last year, leaving little short-term upside for investors who bought in the secondary market.
In China, a 44 percent limit on first-day gains and a 10 percent cap thereafter ensures IPO discounts narrow over several sessions. That increases the chance of a seller unloading their position too soon, either because theyre uninformed or have urgent liquidity needs, according to Ken Chen, a Shanghai-based analyst at KGI Securities.
The key to buying those shares is getting your order to the bourse before anyone else.
Each morning during its opening auction, Shenzhen accepts bids that arrive at 9:15 a.m. or later. Under the old system, traders with computer systems located closest to the exchange had the advantage because it took less time for their orders to travel through fiber-optic cables to the bourses servers, according to a person familiar with the matter.
Under the system started in June, the Shenzhen exchange allows brokers to gauge their transmission time (or latency in the industry jargon) and place orders slightly before the opening auction begins, accepting those that arrive at 9:15 a.m. or later. That means a buyer from Beijing, 1,200 miles from Shenzhen, could theoretically beat a rival located right next to the exchange, the person said.
While its unclear whether the new system has substantially affected the chances of success on hit stock trades, exchange figures compiled by Bloomberg News show a changing mix of winners.
Before the system upgrade took effect, this years most active first-day buyer was a branch of Chinalin Securities in Shenzhen. Of the 29 IPOs that had begun trading through June 6, the broker was a top-five purchaser of six during their debut trading sessions.
After the change, the Chinalin branch ranked as a top-five buyer in just two of 70 IPOs. The new leaders are a Donghai Securities branch in Changzhou, about 730 miles from Shenzhen, and a Zheshang Securities branch in Shanghai. They both secured a top-five ranking in seven new listings, versus none under the old system.
Calls to the Chinalin and Donghai branches went unanswered. An employee at the Zheshang Shanghai branch, who declined to identify himself, said the office didnt notice a difference between the earlier and current systems, based on feedback from clients.
Some broker branches with technological edges used to appear quite frequently on the top buyer lists of new shares, but we are seeing more diversified lists now, said Paul Yang, a 33-year-old private investor in Shanghai who traded shares at an investment firm for eight years before quitting to manage his own money.
This suggests less distinct advantages for some after the adoption of the new trading system, as well as a more fair and random ordering process, he said. But its unlikely to make the game entirely fair.
Representatives from the Shenzhen exchange and its counterpart in Shanghai declined to comment. Odds of success for hit stock trades in Shanghai have always been lower than those in Shenzhen, according to senior managers at Chinese brokerages who asked not to be named because the information isnt public.
The trades biggest drawback is that its difficult to execute in bulk. A dearth of sellers keeps volumes low, with the average first-day turnover for new offerings in Shenzhen this year totaling just 280,000 yuan ($40,500). Daily turnover averaged 37 million yuan over the first 10 days, versus 176 million yuan for the Shenzhen Composites median stock by market value.
But even small holdings are better than nothing in a year when the citys benchmark index is down 7.9 percent. For Shenzhen IPOs with at least a month of trading history, the average return to investors who purchased at the first limit-up price was 366 percent through Friday, according to data compiled by Bloomberg.
Of course, getting in that early is easier said than done.
I tried to buy new shares after the system upgrade but failed, Yang said. One day, I might be able to succeed.
With assistance by Amanda Wang, and Gary Gao
Theres a Chinese saying that comes from your doctrine in Sun Tzus historical text The Art of War: 1,000 enemies, but can be killed by You you’d also drop 800 troopers.
Centuries after, the adage is unexpectedly appropriate again, being mentioned often in conversations around Beijing. Now, it emphasizes the possible damage U.S. President-elect Donald Trump could inflict if he makes good on his threat to begin a trade war with China, the worlds second-largest market.
Having backed off another campaign assurances, its uncertain if Trump will finish up smacking punitive tariffs on China — and Beijing has indicated some confidence he’ll be more realistic in office. However, the concept from China is that any shift to tax Chinese imports would provide retaliation: The United States economy would simply take popular and America would harm its long-standing ties with Asia.
China wouldnt like to see that occur, Fu Ying, who chairs the Foreign Affairs Committee of the legislature and was a vice foreign minister until 2013, stated of the US inflicting punitive tariffs. But if so occurs, it wont be one way traffic, she mentioned the other day in Beijing.
While China has warned the US against picking a struggle, the possibility of a more protectionist America produces an opportunity for President Xi Jinping in Asia, where trade-dependent countries are anxious about the possible side effect. Xi has raced to describe his country as a champion of free-trade, and he could be given an avenue to develop his punch by Trumps activities. Xi has spoken of his wish to have the same great power position have by the United States, pushing back against American hegemony since World War II.
The US has been utilizing the tactic of carrot and stick, and that’s on the stone, stated Wang Wen, executive dean of the Chongyang Institute for Financial Studies at Renmin University in Beijing. Chinas commerce first or economical first foreign-affairs coverage in Asia is more complex compared to the US, he stated. A peaceful surroundings is needed by Asian nations.
Any dimming of American influence in Asia additionally presents China with all the challenge of handling a regional buy that has created dramatic economic increases below the U.S.s view. Does it enforce its goal not only through financial strength but by shaping geo-politics beyond its edges? Or does it adhere to its preferred position of noninterference, focused like commerce and climatechange on problems in its selfinterest?
China nevertheless lacks the expertise in participating global affairs, and nevertheless h-AS a good deal to discover in the worldwide arena, mentioned Yan Xuetong, an associate of the Consultation Committee of Chinas Ministry of Commerce. There is going to be challenges as time goes on as well as its expanding impact for China, and there may be sensitive international problems that drive selections to be made by China, he explained.
China retains an obvious bottom line in managing international disagreements it disapproves of the usage of force, stated Yan, who’s also manager of the Institute of International Studies at Tsinghua University in Beijing. China should function quite difficult to take an alternative strategy in the United States in global affairs.
For the present time, China h-AS a 2-pronged reaction to to Trumps raising: Warn him of the effects of unilateral actions and hasten efforts to procure an Asia-broad trade pact that will not contain the United States of America
Beijing needs to secure the Regional Comprehensive Economic Partnership — A16-country trade pact with Southeast Asian states plus states including Japan and Australia — when you possibly can, allowing to the Ministry of Commerce. Its one method to pointedly distinguish China from a mo Re inward-seeking America. Another round of negotiations is planned in Indonesia from Dec. 2.
Globalisation continues to be the tendency on the planet, Fu mentioned. The US began it, you gained from it and now you dont enjoy it. So whats next? Have you got a replacement? Are you experiencing an improved alternative? The tendency just isn’t planning to wait, she mentioned. Perhaps it can be better managed by us.
When it comes to an immediate answer, China — the U.S.s largest lender and trading companion — might increase taxes on American imports and change to alternative states, she stated. Really, she couched risks that were Trumps as a chance in area.
There are individuals in China who’d be content to make use of that minute if the U.S. introduced tariffs, Fu said. Therere rather several places where some in China believe our interest got damage like soy, in trading — soybean plantation has been totally lost by us . We’ve got a lot more than a decade of great crops, but we have been continuing to import triticum that is American. Should we?
China is the biggest importer of U.S. soybeans and purchased $20.3 billion of U.S. agricultural items last yr, allowing to the U.S. Department of Agriculture.
Sticking it to Foreigners
China h-AS every economical and political motivator to indicate early that it is going to retaliate proportionally, mentioned David Loevinger, a former China professional in the U.S. Department of the Treasury and now an analyst at fund supervisor TCW Group. President Xi Jinping cant be viewed as poor. Sticking it to noncitizens will likely be in the same way appealing politically in China as it’s in the US
More widely, if Trump retains his guarantee to get in the 12-state Trans-Pacific Partnership, China could better cement its placement in Asia through its advocacy of RCEP, according to Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA in Hong Kong.
A U.S. disengagement from commerce with Asia would assist, somewhat than damage, China, while a mo Re competitive strategy to the bi-lateral connection with China would risk sabotaging U.S. passions, she mentioned in a notice. The trade and creation constructions of China and Southeast Asian countries are becoming more and more interchangeable, she stated.
United States remains a state that was robust but no longer h AS world-wide hegemony, mentioned also manager of the Institute of International Studies at Tsinghua University in Beijing, Yan. The Chinese leaders will not wish to challenge the U.S. dominance, but the US has to discover a method to cope with China, which is a major-power and wants co-operation but perhaps not confrontation.”
Fu repeated that, describing the connection that was existing as complemental.
We are able to well work to discover alternatives to differences, as opposed to cutting down on each other, she mentioned.
With support by Keith Zhai, and Ken Wills
The rally in metals is showing no signs of slowing down.
The Bloomberg Industrial Metals sub-index posted the biggest five-day gain since 2011, as zinc touched a nine-year high. Prices rallied after Chinas top economic commission approved a $36 billion plan on new rail links around Beijing, boosting demand for industrial raw materials.
- Zinc for delivery in three months rose 2.9 percent to settle at $2,900 a metric ton at 5:50 p.m. on the London Metal Exchange, after touching $2,985, the highest since October 2007.
- The metals volatility, measured in price swings in options, is at the highest since 2010.
- Lead is up 18 percent since Nov. 18, the biggest six-day advance since June 2009.
- On the Shanghai Futures Exchange, both zinc and lead closed limit up.
Zinc, used as a coating on iron and steel to protect against corrosion, is the best performer among 22 raw materials on the Bloomberg Commodity Index this year, with the metal rallying 80 percent this year, poised for the steepest climb since 2009. The metal will be in deficit through 2018, Bloomberg Intelligence analysts Kenneth Hoffman and Zhuo Zhang wrote in a note Monday.
There seems to be no stopping the juggernaut we are seeing in the LME metals, a move that is not being replicated in the commodity space with the exception of coal and the ferrous group, Edward Meir, an analyst for INTL FCStone Inc. in New York, said in a note.
Investors see zinc as the metal with the tightest supply situation given the multitude of closures that have taken place over the past two years, Meir wrote.
Industrial metals rallied almost 30 percent in 2016 as demand stabilized in China, U.S. President-elect Donald Trump pledged to invest in infrastructure and revitalize the U.S. economy, while mine closures curbed supply. Chinese investors have added to the speculative binge.
Were bullish on zinc and lead given the tightness in ore supply and potential production cuts at smelters in coming months, but the speed of the rally exceeds our expectations, Dina Yu, an analyst at CRU Group, said by phone from Beijing. There have been no big changes in fundamentals that can explain such a surge. The market is driven by bullish sentiment in all metals.
Copper for delivery in three months rose less than 0.1 percent to $5,881, and broke above $6,000 during the Asian trading day on Monday, bringing call contracts at that price into the money.
Copper is moving too fast, said Christoph Eibl, chief executive officer and co-founder of Tiberius Asset Management, which oversees about $700 million. Its not being driven by fundamentals. Its moving on speculative interest and short-covering in the options market.
Money managers extended record bullish bets on the metal, according to data on Monday from the Commodity Futures Trading Commission. Net-long positions in copper rose 8.2 percent to 76,346 futures and options contracts in the week ended Nov. 22.
Analysts also cited short covering as a reason why the rally in metals has moved so quickly. When prices were flat, many traders made money by selling options and betting the contracts would expire worthless, according to Guy Wolf, global head of market analytics at Marex Spectron. As prices rally, theyre faced with the prospect of having to pay out on the contracts and need to cover the position by purchasing futures, he said.
Its like being in a bush fire and trying to buy fire insurance, Wolf said. You have to take any price you can get.
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