The securities regulator has taken increasing steps recently to allow more foreign players to enter the A-share market. This is a move that will attract more funds to the securities market on the eve of the Industrial and Commercial Bank of China's (ICBC) listing on October 27 while further opening up China's financial market in accordance with its World Trade Organization commitment.
The China Securities Regulatory Commission (CSRC) last month approved as many as five qualified foreign institutional investors, or QFII the highest monthly approval for 2006.
In the past three months, the CSRC approved 10 new QFIIs and the number has been rapidly increasing after the approval of six QFIIs in the first six months of the year. Meanwhile, the combined investment QFII quotas broke US$8 billion after the State Administration of Foreign Exchange (SAFE) said on October 9 it had granted Credit Suisse a US$200 million quota.
The SAFE data also shows that the market saw an inflow of US$15.6 billion from overseas investment in the same period, up 108 percent year-on-year. All this reveals China has quickened its pace in introducing foreign institutional investors into the A-share market after it successfully conducted a securities reform to convert State non-tradable shares into tradable ones.
"In fact, it would be 'short-sighted' to link the introduction of more QFIIs with fund shortage pressure on the debut of ICBC shares," said Zhao Jianxing, an analyst with Shenzhen-based China Merchants Securities. "It is high time for A shares to be linked into a worldwide investment portfolio through the introduction of more QFIIs."
Though the flow of more QFII funds into the A-share market will surely help the ICBC's listing, it is not a short-term move taken under pressure, but part of a long-term strategy to speed up the opening of the financial market to foreign investors.
The CSRC issued a new rule in August, lowering the threshold for long-term investors to encourage more QFIIs to enter China's capital market.
Under the new rule, the capital lock-up period for overseas pension funds, insurance companies and mutual funds has been cut to three months from the original one-year lock-up period.
The securities assets requirement for potential QFIIs meanwhile was reduced from US$10 billion to US$5 billion.
"By lowering the standards for institutional investors, including fund management companies and insurance companies managing long-term fund assets, the regulator aims to encourage long-term investment in the securities market," the CSRC said in a statement.
The measure is in line with China's intention to introduce more institutional investors to enhance the stability of a market that has so far been dominated by retail investors. Along with the growth of institutional investors, a long-term investment culture is emerging.
As QFIIs enter the A-share market, new investment features have also been introduced to the domestic securities market.
"The fact that it takes a longer time for a QFII to set up a renminbi-denominated investment account than domestic investors means QFIIs have a longer investment/return turnaround in the securities market," said Daniel Zeng, chief investment officer with First State Cinda Fund Management Co Ltd.
A QFII, like a pension fund or a social security fund, has a longer investment/return term in the stock market usually three to five years and QFIIs tend to prefer investing in blue chips as they usually reflect the country's economic growth.
The Shanghai 50 index, comprising 50 major blue chips in the A-share market, rose by 3.2 percent on the first day of trading after the week-long National Day holiday.
And the Shanghai & Shenzhen 300 index, composed of 300 blue chips, rose 2.3 percent.
Both indexes exceeded the rising scope of the Shanghai composite index and indicated that market capital is flowing into blue chips.
The ICBC, the country's largest lender, will replace Sinopec as the biggest blue chip by issuing as many as 13 billion A shares on the Shanghai bourse. The bank is likely to attract more institutional investors seeking long-term investment on the A-share market and wanting to take a share of the bank's growing profit.
Banking shares have enjoyed increasing popularity over the past two weeks as more long-term institutional investors such as QFIIs and insurance companies enter the A-share market.
Although some analysts believe there will be less investment opportunities in the second half of 2006 compared to the first half, it is likely that as the ICBC lists, China's stock market will face the biggest challenge and also the biggest opportunity in its history.
This opportunity should not be seen in terms of the amount of funds that flow into the market. Instead it is an opportunity for the market to undergo fundamental change in introducing more institutional investors, cultivating a long-term investment concept, and further opening the capital market to the rest of the world.
(China Daily October 20, 2006)