There's a fishy smell coming from the Chinese stock market right now. 

Think of your local Chinese restaurant. Perhaps it was popular for years, but recently it's had some trouble, and fewer people eat there.

But there's something even more peculiar going on -- the chef eats at the local Subway every day.

That's right: The chef won't eat what he himself cooks. For most people, that's a pretty clear signal to eat somewhere else.

It's no different when it comes to investing in a company. Would you buy shares in a business where the management doesn't hold a lot of shares?

Few people know what's in the soup better than the chef. Similarly, few people know more about a company than its senior management. And if they aren't buying the stock, why should you?

That's the question investors should be asking themselves when they look at China right now. Even though Chinese companies and individuals have always invested abroad, the amount of money being invested by Chinese outside China has accelerated in recent months.

In just the first three months of 2016, the Chinese invested more in foreign mergers and acquisitions than they did for all of 2015. According to the Financial Times, global M&A activity by Chinese firms was $101 billion in the first quarter of this year.

This included some headline-making major acquisitions, like ChemChina's acquisition of Switzerland-based agribusiness Syngenta (SYT) . Anbang, a Chinese insurance group, also offered $82.75 a share for Starwood Hotels (HOT) earlier this year. The deal did not go through, but if it had it would have been the largest takeover of a U.S. company by a Chinese firm.

There's a good case for Chinese investors to look abroad for investment opportunities. International diversification and buying intellectual property rights (which can be controversial) are just some of the reasons they might be investing abroad. There is also the prestige that comes with holding sought-after foreign assets.

But perhaps there's another reason -- there are no longer as many attractive investment opportunities at home. No one knows the state of the Chinese economy better than the companies that operate there. If they see better opportunities outside their own borders, it could be a sign that something's wrong with China's economy.

The Financial Times also recently noted, "Advisers and analysts have attributed part of the boom [in money being invested outside of China] to broader concerns over the stability of the renminbi, and suggested that the rapid pick-up in deals in some ways resembles capital flight."

In other words, Chinese companies are worried that the renminbi will fall in value. To protect themselves, they buy foreign companies to get exposure to other currencies.

But just because Chinese investors are investing abroad doesn't mean you should stay clear of the Chinese stock market. The stock market could still provide some decent returns (which might be fueled by more investing on margin).

But this sort of capital flight should give pause for thought to any investor looking to put some money in the Chinese stock market.

This is reminiscent of what happened in Russia in the mid-to-late 1990s. In 1996, the Russian stock market went up 142%. In 1997, it went up another 98%. So, by 1998 foreign investors were eager to put some money to work in the Russian market. It had been posting huge returns and the shares were still cheap by some measures.

Local investors were selling, though. Large local shareholders were more than happy to sell their shares to these excited foreigners. This might have been partly because they could read the tea leaves about what was going to unfold, and they took profits -- at just the right time.

Then, in 1998, the price of oil collapsed and this hurt the Russian economy (just like today). Russia defaulted on its debt and the value of the ruble plummeted. The stock market also tumbled 90% within months.

Then when the Russian stock market stopped falling, many local investors were happy to buy back shares foreigners were dumping at heavily discounted prices.

So, you should pay attention when Chinese companies invest more money outside of China than inside. But when Chinese investors are more than happy to sell foreigners their Chinese shares, you should sell too -- and quickly. Because if the chef is no longer eating his own cooking, it's best to stay away.

Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.