A-share market opens up
The eyes of the investing world are very much focused on Asia as one of the few bright spots offering the prospect of steady returns and above-trend equity gains.
With the United States economy bumping along and Europe once again teetering on the brink of recession, fund managers and institutional investors understandably see China's continuing gross domestic product (GDP) growth of 8 per cent plus as a beacon. They are, therefore, scrutinising any new opportunity to get a foot in the door of the mainland market with more than the usual intensity.
That largely explains interest surrounding the move by the China Securities Regulatory Commission (CSRC) to raise the limit foreign funds can invest in the A-share market. Last month's announcement will allow international asset managers to apply for expanded quotas under China's qualified foreign institutional investor (QFII) scheme. The total quota will increase from US$30 billion to US$80 billion.
At the same time, the equivalent renminbi QFII scheme, denominated in yuan, will see the release of a second batch of quotas. These amount to 50 billion yuan (HK$61.4 billion) and can be used for A-share exchange-traded funds listed in Hong Kong.
Clearly, restrictions apply and, in the overall context, the quotas might not seem generous. However, the moves have been widely welcomed as another sign of the progressive opening of China's financial sector and further incentive for overseas funds to raise their stake in the mainland's domestic economy.
'At the moment, there is no A-share quota in our funds, but it is something we are investigating,' says British-based James Millard, chief investment officer of SIG (Skandia Investment Group), who oversees global decisions covering a range of asset classes. 'We have increased allocations for China based on general GDP weighting in our global equity portfolios and still access related opportunities in Hong Kong, which is a deep market with good liquidity.'
He views further opening of the A-share market in a positive light. It will attract new capital and build a broader base of institutional investors. They may have different investing styles, and their participation will bring status and an increasing sense of stability to the Shanghai and Shenzhen exchanges. 'We believe cross-border flows will help the mainland's capital markets and enhance returns on equity,' Millard says.
Though not responsible for stock picking, he suggests some China-based equities look undervalued if seen in an international context. Banks stand out. They will be able to benefit from their domestic customer base, widening range of products and ambitions for overseas expansion, which should feed through to profit statements and equity valuations.
'In our view, their non-performing loans are under control and balance sheets remain pretty strong,' Millard says. 'Also, policy makers can control any [effects of] a decline in property prices. Other Chinese companies don't necessarily offer compelling value, but the banks have been 'beaten down' and the downside has already been priced in, so we are pretty positive there.'
Given the expected demand from investors, the new QFII quotas strike many as too conservative. However, Jenny Sheng, a partner in the corporate and mergers and acquisitions practice of law firm Paul Hastings, says this is simply another instance of the mainland authorities' step-by step approach to economic liberalisation.
Basically, Sheng explains, the CSRC's announcement is meant to send a clear and positive message to overseas investors that the central government is intent on opening up the capital markets and accelerating market-based reforms. This latest move gives global financial institutions what they have been pushing for - more access to and a more active role in China's equity markets. Realistically, though, those major investors all know how things work and accept by now that such policy-driven changes are always incremental and often slightly obscure.
'This is an important step taken by the central government to further liberalise the capital account,' Sheng says. 'But remember too that the US$50 billion QFII quota will not be immediately allocated. It will be allocated to individual institutions on a case-by-case basis in a relatively opaque process.'
That may sound far from perfect, but the methods will still serve two key objectives. The new quotas will increase the liquidity of mainland equity markets, also helping to restore confidence. And foreign funds will have that much more scope to participate in China's growth.
Andrew Freris, chief investment adviser, Asia, for BNP Paribas Wealth Management, expects that theme to dominate in the coming months. With equities in Europe and the US holding limited promise, he is pinning his hopes on emerging markets - and Asia in particular.
'With GDP at 8.1 per cent, China is still achieving a remarkably high-growth rate with low inflation,' Ferris says. 'The question of a 'soft landing' for the mainland economy should be a non-issue.'