Mainland on track to dominate region

The mainland's stock markets could be the biggest by market capitalisation in non-Japan Asia once Beijing opens domestic exchanges to foreign buyers.

CLSA Global Emerging Markets managing director Jing Ulrich yesterday said she believed the mainland might take the historic step of allowing foreign investors to invest there as early as next year, even before the currency was fully convertible.

The nation's B-share market is open to foreign investors, but the A-share market is closed.

'We believe that, during the next 12 months to 18 months, foreign investors could be allowed to invest in the A-share market on a restricted basis,' Ms Ulrich said.

'In terms of market cap, the mainland market has the potential to become the largest in Asia ex-Japan. It will probably happen in five years' time, maybe sooner.' Ms Ulrich suggested restricted trading could occur by implementing a qualified foreign investor system - used in other markets with closed accounts, such as Taiwan.

In a report, Land of the Giants, Ms Ulrich said that under a scenario whereby the mainland's A-share market was opened up, the marketplace would have the highest percentage weighting in CLSA's Far East Tracker index - 30 per cent, from the 9.5 per cent at present.

Beijing officials are in the process of discussing market reforms, including a merging of the A- and B-share markets. Ms Ulrich said it would be unlikely for a merger of the two mainland markets to go ahead until the currency became fully convertible.

Market reform talk has come at a time when the mainland is glowing with good news on the macro-economic front and is set to enter the World Trade Organisation. This year has seen exports soaring, deflationary pressure bottoming, electricity consumption on the rise and improving profitability among key state-owned enterprises.

The Shanghai A-share market has gained 44.39 per cent this year, with Shenzen's A-shares up 52.61 per cent.

'I think China is at a crossroads. Obviously, we have seen very good first-half economic numbers and Asia has come out of the economic crisis,' Ms Ulrich said. 'We think this is the right time to push the market and recommend China shares to the foreign market. As the investability of the markets increase, they are going to look at China shares.' At the forefront of the mainland's restructuring efforts are its best companies, she says. They are the ones which will set the pace for reform and drive the rest of the state sector.

Now that inflation was 'slowly edging up', more companies would have greater pricing power.

Telecommunications were expected to perform well, with the mobile sector leading. Ms Ulrich singled out China Mobile (HK) as reaping the benefits of a forecast increase in rates for mobile telephone subscribers.

Graphic: clsa13gbz