China stock market rout seen as opportunity to push reform and broaden investor base

Volatility driven by the mainland's narrow investor base, prompting calls for Beijing to accelerate opening up of the capital account

PUBLISHED : Thursday, 17 September, 2015, 12:54am
UPDATED : Thursday, 17 September, 2015, 12:54am

Some global investors, watching Beijing's relentless efforts to arrest a stock market rout, argue that the setback presents a great opportunity for China to speed up capital account relaxation.

Marc Desmidt, managing director at BlackRock Asset Management North Asia, said the equity rout highlighted the need to diversify the domestic investor base, currently dominated by retail investors.

"Our thesis is a market with a broad range of participants is better able to deal with more complex dynamics," he said at the Treasury Markets Summit in Hong Kong on Wednesday.

"The volatility we've seen in the [China] market to some extent is because the range of market participants is narrow. It was largely retail-based investors driving the volatility.

"It's only human nature. When you are under stress, you would turn inwards," he explained.

"But it's a fantastic time and a fantastic signal for the government to say we want to broaden the investor base and bring in a more mature, sophisticated institutional investor base. It's also sending messages that China is prepared to take constructive measures at a time of stress to continue to accelerate reforms."

Asked if recent events had led investors to lose interest in China, Desmidt said institutional investors certainly understood the long-term opportunities.

"It's not going to derail their appetite to have more," he said.

Following the launch of the Shanghai-Hong Kong Stock Connect scheme in November last year, Beijing has unveiled more schemes to allow cross-border capital flows, including the qualified domestic individual investors (QDII2), the mutual recognition of funds between Hong and the mainland, and plans for a Shenzhen-Hong Kong stock trading link.

But the bursting of the equity bubble has seen the clock tick backwards, with a dearth of details available about those investment programmes.

Many market observers now expect the Shenzhen-Hong Kong equity trading link to be delayed until next year.

Frank Zhang Xiaoling, deputy chief executive at China Asset Management, said the stock market sell-off had proven the infrastructure of the Shanghai-Hong Kong Stock Connect was "sound and robust".

"If the Shenzhen stock connect is launched, it will send a strong signal to the rest of the world that China is still committed to opening up," he said at the summit.

Macquarie China strategist Erwin Sanft, who did not participate in the summit, was more upbeat.

"We think the Shenzhen connect is likely to be launched on the anniversary of the Shanghai connect [which falls in November]," he said. "We understand the preparation work has largely been done and not much further work is needed.

"The domestic stock market has been through the most difficult time. I think the authorities are interested in sending a signal to the market, by virtue of launching the Shenzhen connect."