[pjc50]

Are China's capital controls really tight enough to prevent Chinese nationals from finding a way to invest in the same stocks on the HK index for a 30% discount?

The answer has to be yes - otherwise, as you say, it would be arbitraged away. It's still a bit leaky, but when it leaks it seems that investors much prefer to diversify into ownership of overseas property.

Why capital controls? Because China is more nationalist than globalist. It's also critical to keeping the industrial policy working by forcing local re-investment and preventing capital flight. Chinese growth depends on cheap money, which in turn relies on forcing people not to charge a risk premium for the percieved confiscation and rule-of-law risks in China.

[hga]

China follows a nasty policy of financial repression (https://en.wikipedia.org/wiki/Financial_repression) in which the interests of "the people" is an afterthought at best.

ADDED: combine that with little to no social safety net, and the One Child policy which most? often results in 4 grandparents supported by 2 children supported by 1 grandchild (not quite so bad in the rural areas, but still inadequate, especially if a child dies), and you have the worst social planning mess outside of outright genocide (which the PRC did a lot of through the Cultural Revolution) that I'm aware of.

[fennecfoxen]

This, incidentally, is why people in China riot about inflation from time to time: if you have to support yourself and several family members, you'd better have yourself a lot of savings, but it's really hard when your bank pays negative real interest rates. (And what's your alternative to the bank? Invest in the property bubble? Ha!)

Then the banks loan out this savings to the party's preferred business partners (still at negative real interest rates) which can be incredibly profitable (cheaper-than-free money will do that) and spend their wealth on a privileged few.

Some day it's all going to come crashing down (and if push comes to shove, the property rights of foreign investors will probably be pretty low on the priority list).

[hga]

and if push comes to shove, the property rights of foreign investors will probably be pretty low on the priority list

Then I suppose it's good they don't let us invest very much in the country!

This makes it unlike e.g. Greece, where we're told there are a number of European banks outside with dangerous exposure, although there's been plenty of time to mitigate that. So conventional contagion might not be such a problem, I myself am worried about various goods and raw materials that the PRC has a current lock on. E.g. lots of pharmaceutical precursors.

[molyss]

I feel like there's 2 sides to the story : 1st, as you mentioned, external investors would have money in the country that they couldn't get back because of the low position on the priority list. On the other side, I feel like china investing in your business makes you own them money. And i their economy comes crashing down, what prevents them from asking for their money back, which you might not have in full, or that you need for planned investments. Is there anything I'm missing ?

[virmundi]

Wow. I didn't know that they really lacked the social safety net. So maybe now that they are more industrialized the could have a real communist revolution and see what happens?