Institutions play weightier role in mainland market

PUBLISHED : Tuesday, 28 August, 2007, 12:00am
UPDATED : Tuesday, 28 August, 2007, 12:00am

Institutional investors are playing an increasingly important role in the mainland's stock market, a sign that the regulator's efforts to underpin the fund industry have paid off.

As of July 31, the mainland's institutions owned tradable A shares worth of 2.37 trillion yuan, accounting for 44 per cent of the total, according to the China Securities Regulatory Commission.

That compared with only 19 per cent of shares listed in Shanghai and Shenzhen in 2004.

'The fast growth of the institutions should be credited to the securities watchdog,' said Essence Securities analyst Liu Jun. 'It's not an innovation by the CSRC, however. It's a necessary step to take.'

Those institutions include the mainland's mutual fund managers, insurance companies, brokerages and qualified foreign institutional investors (QFIIs).

The 347 equity investment funds operated by 59 fund management firms held stocks worth 1.67 trillion yuan representing 31 per cent of all tradable capitalisation, according to the securities watchdog.

Crowded by individual investors, who viewed the stock market as a casino rather than a capital market during the 1990s, the CSRC encouraged more institutional investors to buy shares in the hope that they would help smooth market volatility.

The regulator also encouraged retail investors to buy funds and let professionals manage their money in the stock market.

However, the fund industry suffered a setback in October 2000 when a scandal emerged that some funds rigged stock prices to shortchange small investors.

The crisis dampened investors' expectations on the fund industry and also set off a five-year slump in the market until last year.

As a part of its efforts to revive the fund industry, the CSRC introduced the QFII in 2003 to bring in expertise from foreign fund managers.

To date, select foreign institutional investors have been granted a total quota of US$10 billion to invest in A shares. The QFIIs are expected to increase their investment in mainland stocks to US$30 billion soon, industry insiders said.

In July, Beijing also doubled the ceiling of stock investment for insurers, allowing them to invest 10 per cent of the total assets, up from 5 per cent previously.

'Our own funds are on the right track now,' said a Beijing-based fund manager who manages 10 billion yuan worth of shares. 'But the current scale of the fund sector is still not enough.'

The growth of the industry has ushered in several star fund managers who were able to sniff out good opportunities and find the diamond in the rough stocks.

'More investors, with confidence in our expertise, began to divert money from their own brokerage accounts to funds,' the manager said. 'If you are looking to stable returns instead of hefty short-term gains, funds are always the top choice.'

More involved

A shares held by institutions have reached, in yuan 2.4tr