Foreign interest grows as A shares fall into line
After four years, yuan-denominated stocks close on international valuations
Almost four years after China's stock-market bubble burst, the prices of yuan-denominated A shares are finally falling into line with international valuations, spurring renewed interest from foreign investors.
Even as Shanghai's benchmark A-Share Index fell to a six-year low last week, some international brokers were reporting increased demand from overseas buyers, who believe the market now represents good value.
'Valuations are closing on international levels,' says Nicole Yuen, the head of Chinese equities at UBS, one of 27 foreign institutions dealing in A shares under China's qualified foreign institutional investor scheme. 'Some blue-chip valuations now look reasonable.'
Since Shanghai's A-Share Index peaked at 2,338 points in June 2001, prices on China's main stock exchange have plunged almost 50 per cent.
The long descent has whittled prices down from as high as 50 or 60 times the underlying companies' annual earnings, to values closer to 20 times earnings. Now, with little difference between the valuations of A shares and their counterparts trading in Hong Kong or New York, interest in the mainland market is rising.
'Valuations are okay, and earnings are growing quite a lot. You can find some attractive selections in the A-share market,' says Zhou Yi-po, an analyst with Martin Currie Investment Management.
Rob Subbaraman, a regional economist at Lehman Brothers, cites the example of Yanzhou Coal Mining. At their peak in June 2001, Yanzhou's A shares were trading at 13 yuan each in Shanghai, or 45 times its annual earnings.
At the same time, Yanzhou's H shares were quoted in Hong Kong at just $3.50, or a price-earnings ratio of about 14.
Since then, the prices of the two share classes have sharply converged to trade in lockstep during much of February. The A shares have been bid up slightly since, but the premium is small. Today Yanzhou's stock is valued in Shanghai at a price-earnings ratio of 26, little different from the 24 times earnings valuation of its H shares.
Yanzhou, which supplies fuel to electricity generators including Shandong Power, and coking coal to steel companies such as Baoshan Iron & Steel, is just the sort of resource-sector firm foreign investors looking for exposure to China's economic growth are keen on. They are also buying shares in ports and shipping companies, power generators and retailers.
At present, foreigners are allowed to buy up to US$3.75 billion worth of A shares under the QFII programme. Brokers estimate that so far between 60 and 70 per cent of that quota has been filled, with demand still mounting.
However, even the bulls are treading carefully. Many of the problems that triggered the long slide in A shares in 2001 are still unresolved. Corporate governance is often sketchy, company accounts are opaque, and market participants dishonest. Local markets are volatile, dominated by individual speculators who are all too ready to buy or sell on wild rumour, and cash out for a quick profit.
Above all, there are still doubts about what the government will do with the more than 60 per cent of A shares classed as non-tradeable, most of which are held by state bodies. Concerns that these shares would be sold off into the open market were largely responsible for pricking the mainland's stock bubble four years ago.
The feared sales never materialised, but until the future of the non-tradeable shares is decided, the overhang will continue to weigh on local investor sentiment, exacerbating volatility. On April 1, talk the government was to postpone sales of its holdings for 30 years sparked a flurry of A-share buying which lifted the Shanghai market 3.6 per cent from its six-year low the previous day. 'It was an April fool's joke,' said one broker, who called the rumour 'ridiculous'.
If the state does announce sales, it is doubtful the authorities will agree to pay the compensation some investors are demanding for dilution of their existing shareholdings. In that case, a subsequent sell-off by retail investors could push A shares below valuations in international markets, says Vincent Chan, the head of China research at Credit Suisse First Boston.
For many of the offshore private banks and funds which have been building up holdings of A shares since the introduction of the QFII scheme in 2002, any further dip in the market will simply be a signal to scoop up more stock.
'Some foreign investors have confidence in the market,' Ms Yuen said. 'Their long-term view is that the market should be nearing its bottom, and that this is a buying opportunity.'