Cynicism lingers over QFII's pull on foreigners With great fanfare, UBS Warburg last Wednesday become the first foreign investor to buy A shares, purchasing the stock of four blue-chip companies on the Shanghai and Shenzhen markets. The start of the qualified foreign institutional investor (QFII) scheme was covered by dozens of Chinese journalists and television crews and hailed as a milestone in the history of the mainland stock markets. But some traders were wondering if the money, invested in Baoshan Iron & Steel, ZTE Corp, Shanghai Port Container and Sinotrans Air Transportation Development, was 'foreign' or from Chinese investors outside the mainland. The money does not seem to have come from UBS itself but from its clients. 'We principally buy for clients,' said Nicole Yuen, head of Chinese equities at UBS. One Shanghai trader said that he found it suspicious that UBS had bought four stocks whose prices have risen substantially this year. 'I wondered if the money actually came from mainland firms who had bought the four and wanted to use the purchase to push up the price and cash out,' he said. 'They could have placed the order through UBS.' The purchase of the four was a media event, at a news conference in a Beijing hotel, which helped to raise their prices. Telecommunications equipment maker ZTE firmed 2.1 per cent on the day, Shanghai Port Container gained 1.18 per cent and Baoshan put on 0.95 per cent. Only Sinotrans fell, by 0.15 per cent. 'Foreigners do not want to buy A shares, which are too expensive and unpredictable. The better Chinese companies are listed in Hong Kong or New York, so why not buy those? Only Chinese investors track mainland stocks,' the trader said. His cynicism is in part a result of previous official attempts to separate 'Chinese' from 'foreign' money. Local investors bought foreign currency-denominated B shares long before Beijing allowed them to do so, just as they buy millions of Hong Kong shares now, even though this is not approved. 'Beijing will not approve the QDII [qualified domestic institutional investors] scheme in the short term, because mainland investors are eager for alternatives to A shares and the government fears a flood of money away from the domestic markets,' he said. QDII is the reverse of QFII, allowing mainlanders to purchase Hong Kong stocks. Ms Yuen said that her company did not ask clients the reasons for buying: 'Before they invest, they do thorough research.' She said that investors would go for large and medium-sized companies, which were well managed, transparent and had long-term profit potential. 'The supply of B and H shares is too limited,' Ms Yuen said. 'In the A-share market, there are more than 1,200 companies to chose from.' She admitted that the biggest problem was the lack of knowledge about A shares among potential investors. 'In the past month we have had contact with more than 200 foreign investment institutions. All say that they have to watch the [A] share market but are not sure if now is the moment to buy. Everyone has a positive attitude, so we must improve the understanding of the A-share market among foreign investors.' Chen Zhengrong, an analyst with Haitong Securities, dismissed the idea that mainland Chinese would use the QFII. 'They can enter the market directly. Why ... invest in this way? It will be used by foreign, not local investors.' It is a market for those who like risk. The share price is high, they pay few dividends and the price earnings ratio is low. The market has a different kind of risk to markets abroad.' Fellow Haitong analyst Lou Wei said QFII could not resolve the problems of the A-share market. 'Over the long term, we must solve the problems ourselves.'