Players in China Telecom re-org: foreign investment banks

I planned to write more about China telecom re-org (revamp, reform) after the recent announcement. Now the CFA test is over, I have more time to think about this.

A few days ago I read this interesting Chinese article which describes some foreign investment banks actions after the re-org news (Appendix). Let me try to explain in simple words. The China telecom re-org is widely anticipated to happen this year, the conventional wisdom is the decesion will be made after August Beijing Olympics. Those investment banks created many warrants (European options) in HKSE with expiration date in August, thinking the annoucement of re-org will make the China Mobile, China Unicom, China Telecom and China NetCom stocks trades in Hongkong have a big swing. They can make money from that.

On May 23, Chinese goverment made the official announcement unexpectedly. The China Unicom, Telecom and NetCom suspended trading for a week or so. Those IB guys have to react. How do they do that? Issue cautious notes or downgrade China Mobile, issue postive notes or upgrade on the other three (while their trading are suspended). People got nervous about China Mobile and bail out, the stock (0941.HK) tank, and the IB guys made money from earlier put positions, and they may also get some calls cheap. A few days later, when the other three stocks resumed trading, they reversed their positions: become bullish on China Mobile 0941, and bearish on the other three, and made another round of money. Who is losing the money? Those poor guys who followed the advice of foreign investment banks did.

One may wonder how could this kind of thing happen? Well, as we know there is no Elliot Spitzer in Hongkong, and not to mention Spitzer himself has already been stripped of power (personal scandal).

Appendix: quote the Chinese article 中国联通“惨案”内幕:国际知名投行导演






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