Only a shortage of officials to draft regulation stands in the way of the mainland rapidly opening the door of its markets to foreign investors. There was no lack of political will from Beijing to bring about the liberalisation which had the potential to rewrite the investment map of Asia, said Anthony Neoh, the chief adviser to the China Securities Regulatory Commission. 'There is a degree of momentum centre stage. There will be some very exciting changes on the horizon,' he said. 'We are talking two years [to implementation] with the bulk of that time being taken up by drafting.' Within a year or two of gaining access, Mr Neoh said foreigners would have US$30 billion invested in mainland markets. With the mainland's capital account staying closed, the route in for foreign investors will be under a qualified foreign institutional investor (QFII) scheme. Institutions would be given an investment quota which they could bring into the mainland to invest on the Shanghai and Shenzhen markets, which boast more than 900 listed companies and a combined capitalisation of $480 billion. Once foreigners were investing in A shares - so far reserved for mainland investors - Mr Neoh expected arbitrage to iron out differences with foreigner-only B shares. Companies could then unify the two issues or buy back their B shares, he said. 'It will happen in the natural course of events that the two shares will merge.' The reforms would not mean that the Shenzhen market would close, but Mr Neoh foresaw it specialising in technology issues, while Shanghai focused on large-cap old economy stocks. Regulations were needed to set up the scheme covering areas such as audit trails, custodianship and transparency. With a limited number of officials capable of drafting them and a heavy workload of other reforms 'that will take time', Mr Neoh said. Once drafted, the regulations need only a rubber stamp from Beijing's State Council to be implemented. There are two role models for the QFII system - India and ironically, cross-strait rival Taiwan, with both expected to send officials to help set up the system. In other moves to prepare the way for foreign investors, a national index - tracking as many as several hundred companies listed in Shanghai and Shenzhen - will begin operating early next year. Beijing would also study ways for state entities to sell down their large stakes in many listed firms to provide more free float and boost market liquidity, Mr Neoh said. Auctions and placements were among the options. The prospect of the opening of the mainland's markets is already on the radar screens of some strategists in Hong Kong. 'Given present trends, we believe our large neighbour to the north could increasingly marginalise Hong Kong,' Salomon Smith Barney said in a report. 'Stripping out Hong Kong-listed China names and the banks and property companies, there is very little exciting left in Hong Kong.' Opening up the mainland markets would bring the possibility of a new category in Morgan Stanley Capital International's Asia ex-Japan index, executive director John Fildes said. Assuming the mainland got a 60 per cent weighting if it was operating a QFII system, its markets would make up about 25 per cent of the regional index, Mr Fildes said. If the 10 per cent weighting of the MSCI's red-chip China Free Index was added, mainland firms would make up 35 per cent of the regional benchmark, pushing down other countries' weightings and importance in fund managers' eyes. 'I don't think it is going to happen overnight but there is definitely a wind of change blowing,' Mr Fildes said. Market commentators gave a cautious welcome to the changes. While little was known about the quality of many A shares, the wider choice was progress. 'That would really put China on the horizon. It would have about 1,000 companies which were investible against 40 or 50 now,' said Kenneth Ho, head of China research at JF Securities. With A-share markets trading at an expensive 40 times earnings, there was unlikely to be a rush to invest by foreigners. 'This is good news but foreign investors will still have a lot of reservations,' said Vincent Chan, the China strategist at HSBC Securities.
