Ignore Non-U.S. Listed China Stocks

BEIJING (TheStreet) -- I live in Beijing, and I only invest in U.S.-listed China stocks. Therefore, I don't bat an eye when Shanghai plunges by 7% to 8% over two days as it did this week.

Why? Because the domestic Chinese stock market is simply irrelevant to me as a U.S. investor. The only reason I watch the Shanghai market is that when it does crash, many U.S. investors tend to panic and sell off these U.S.-listed China stocks, leaving bargains for those of us who know better.

So why should you ignore the domestic Chinese stock markets ?

First, the mainland Chinese stock markets are closed to basically all but a few "qualified foreign institutional investors," or QFIIs. This means, even though I live in China, that I can't invest in the stock market even if I wanted to. And as a result of this, Shanghai's true impact on other world stock markets is very much muted.

Second, the fact that there is no way to short Chinese equities has meant that there is no self-regulating market mechanism to counter sometimes absurd buying pressure by retail investors. This means that Chinese equities can be massively overvalued and stay that way for a long time.

Even when Chinese stocks crash, they still can be valued much more expensively than identical shares in shortable Hong Kong. As a result, even when Chinese shares fall, Hong Kong- listed shares don't always follow suit. Even after a significant drop, the mainland shares are still overvalued by comparison, so they don't drag Hong Kong down as much as might be expected.