Most investors and traders make the mistake of believing that all it takes to do well is “guessing” whether the price goes up or down. They automatically assume that once you’ve got that part sorted out, it’s the market’s duty to make your path toward your hard-earned riches as straightforward as possible.
And, indeed, it’s quite understandable why things stand this way in light of the fact that at this point in time, the actual process of buying and selling anything from Chinese stocks to US stocks, bonds, cryptocurrencies or anything else takes place online. In the absence of let’s say the human element of the past (even if it was nothing more than a phone conversation with your broker), many market participants equate investing/trading to a game.
In a way… well, it is, but it’s a game played against fellow human opponents.
For you to buy a Chinese share, another human being willing to sell his has to be on the other end of the transaction. The same way, for you to “dump” the assets you bought low now that prices are sky-high, you need willing buyers. Once again, actual human beings who are eager to take on the other side of the trade. As straightforward to the point of ridiculously simple as this may seem, more and more people fail to acknowledge the human element, hiding behind more or less fancy terms such as “liquidity” or “trading volume” when in fact, both essentially make it clear that it takes (more than) two to tango.
The bottom line is this: if you do not take the time to meaningfully understand liquidity now, you will inevitably learn the exact same lesson the hard way, when you are left holding the proverbial bag for one asset or another due to there not being adequate enough liquidity at a certain point in time. Because yes, there are indeed instances in which investors either decide to hang on to a certain position a bit longer (in the hope that liquidity will improve) or accept an ask price haircut (so as to meet the bid price liquidity) in the spirit of getting things done. Either way, less than desirable scenarios.
Where do Chinese assets fit into all of this?
Are Chinese assets liquid or at least liquid enough?
It ultimately all depends on your frame of reference. For example, there are over 100 Nasdaq-listed Chinese companies at this point in time and if we are to compare those to let’s say assets that are traded over-the-counter, the Chinese assets in question will seem downright liquid. However, if we compare those 100 companies to Apple… let’s just say that Apple is light years away in terms of liquidity to such a degree that the comparison seems pretty much pointless.
The short answer: it depends.
The longer answer revolves around something that is essentially good news: the fact that various Chinese assets have been around the proverbial block for so long that you can find them on a wide range of venues, from formal exchanges such as the previously mentioned Nasdaq, to OTC platforms and so on.
From let’s call them straightforward assets such as shares where there is little room for interpretation to various more or less complex derivatives, the sky is the limit in terms of possibilities for those who are serious about gaining meaningful exposure to Chinese assets.
There is, in fact, so much variety that limiting yourself to simply using the term “Chinese assets” is no longer enough. Think of it as someone telling a friend in 2020 that he works on “computer-related things” compared to telling a friend something similar a few decades ago. In the more distant past, in light of there being considerably less computer-related jobs than in the present, you could indeed tell others you work in computer-related fields and it would have most likely been specific enough to be considered a satisfactory answer. Nowadays? You can be a programmer, Web designer, online business owner, online marketer and the list could go on and on. In fact, who doesn’t at least occasionally work on a computer in the 21st century?
The same principle, in spirit, is valid when it comes to Chinese assets.
Pick your poison.
If you are interested in a more conservative approach to gaining exposure to Chinese assets, you will find decent enough options on formal exchanges, assets which are popular enough to also be reasonably liquid but with these positives come negatives as well, such as you most likely needing to accept lower returns in exchange for the increased convenience. On the opposite end of the spectrum, those interested in blazing trails and chasing after career-defining returns on investment can do just that by gaining exposure to more “obscure” Chinese assets. Once again, it’s ultimately your responsibility to accept the cons which come with pros such as a higher return potential as a package deal, with lower liquidity oftentimes included in the equation.
The ChinaFund.com team firmly believes in smart diversification, or in other words, being diversified enough but not to the point of spreading yourself too thin. As such, in our opinion at least, there is room for highly liquid as well as less liquid assets in each and every portfolio. “Risk management” is the operative term here and in the spirit of not being a one trick pony as an investor and/or trader, savvy diversification is a must. Should you feel the same way, we would be more than pleased to work with you or your organization toward building a sustainable “all things China” portfolio. For more information on what we can do for you, read our Consulting page or to get in touch right away, simply use the Contact section of ChinaFund.com.