Wednesday, 15 August 2018

The evolving A-share experiment

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China’s A-share market has taken off following years of reform work and a huge injection of state money into domestic brokerage industry. However, the market continually teeters between boom and bust, and while the market shows huge promise, it lacks depth and a critical mass of good and decent yielding blue chip stocks. Fiona Lau reports.

The revival of the Chinese domestic market over the last 12 months has caught global spotlight. The terrific economic growth, high-flying corporate earnings and tremendous liquidity have constituted a rocketing A-share market. Since January 2006, the Shanghai A-share Index soared 314% and closed at a historical high of 5,060.19 on August 13.

The flying Shanghai index is now acting as a driver for movements in other markets. The A-share market, which in the past did not have much impact on the Hong Kong stock market, is now influencing the ups and downs of the benchmark Hang Seng Index and H-share index.

And the Hong Kong market is not the only one to come under the spell of the A-share market. An 8.8% slide in the Shanghai market on February 27, triggered by the fears of monetary policies to cool the overheated market, led to a global market corrections of 2% to 3%.

The A-share market rebounded quickly after the deep correction, emerging from the turmoil even more prosperous than before. To cool the red-hot market, the Chinese government raised interest rates five times consecutively, and lifted banks’ required reserve ratios nine times in the past year.

In a series of unexpected measures, the government tripled the stamp duty on share trading in May, and a further relaxation in the Qualified Domestic Institutional Investor (QDII) programme, should help to drain about US$7bn of liquidity.

All the implemented measures, however, only had a temporary impact on the mainland stock market and in all cases, it bounced back faster than anyone expected. The soaring market lures more and more citizens to put their money into the stock market, with the latest figures showing that China currently has about 100m retail investors, the highest number in the world.

In addition to its attempts to regulate demand in the stock market, the Chinese government also aggressively increased the supply of good quality listed companies to cope with that excess demand.

After intensive encouragement by the mainland regulators, Hong Kong-listed H-share companies such as China Life Insurance, Ping An Insurance and Bank of Communications all went back home to list in the Shanghai market. Other H-share companies lining up for a home listing in the next two months include the Rmb50bn (US$6.59bn) float of China Construction Bank and the Rmb40bn (US$5.28bn) A-share IPO of PetroChina.

Chinese regulators are also eager to bring red chips (companies which operate in China but are registered outside China) home. Currently, China only allows domestically registered companies to list in the A-share market, but new rules are being drafted that will open the door for red chips. Red-chip entities such as China Mobile and the PC maker Lenovo have been looking at spin-off listings in Shanghai that could raise renminbi-billions.

Bringing giant mainland companies home is not enough from the mainland regulator’s point of view. Early this year, it began blocking corporate attempts to go for overseas listings.

In September 2006, the China Securities Regulatory Commission (CSRC) announced a moratorium on offshore SPVs that makes red-chip overseas listing difficult. And beginning this year, the regulator also put its foot down to prevent companies that raise less than US$1bn from listing in Hong Kong.

The measures are effective. The mainland IPO market raised US$20.6bn as of mid-August this year, almost matching up the US$21.6bn raised in the whole of 2006. The staggering sum amply demonstrates the depth of PRC liquidity and the Chinese market’s capacity to digest IPO deals. The bourse is also expected to beat Hong Kong on IPO fundraising this year.

While China is opening its market door, its heavy interference remains. The control of the QDII and the qualified foreign institutional investor (QFII) scheme is arguably necessary given the non-convertible nature of the currency. But the bizarre interference in other financial areas inevitably raised eyebrows in the market.

To protect its recovering securities industry, China has stopped issuing Sino-foreign securities joint venture licenses to international banks as of last September. That is set to change, however, and it promises to re-open the door later this year, following pressure from the US.

In the IPO market, China’s heavily-intervened pricing system forced China Citic Bank to sell its shares at a lower valuation in April this year (see box). The “unstated bookrunner” rule also kicked Goldman Sachs Gao Hua, Goldman’s China securities JV, out of Bank of Communications’ Rmb25.2bn (US$3.2bn) A-share bookrunner club. The bank was told by the regulator that it had too many bookrunners.

With more and more Hong Kong-listed Chinese companies going home, the increasing diversity and quality of the companies listed in Shanghai has paved the way for the next big thing in the China market –the imminent launch of long-awaited index futures.

The CSRC, along with futures exchanges, the China Futures Monitoring Center and the China Futures Association, has recently discussed launch of index futures in China, which is expected to happen later this year. China has never had index futures, so this would be an entirely new instrument, and would certainty test the depth and stability of the market.

Foreign investors will also have a chance to participate in the index derivatives market, though the participation is very indirect and limited. It is said that QFII will be allowed to participate in index futures trading simultaneously with the market launch. On top of the existing US$10bn QFII quota, US$1bn or 10% more will be approved to invest in index futures.

Longer term development in the Chinese capital markets will be the establishment of the second board. The Shenzhen Stock Exchange is looking to launch a Growth Enterprise Market (GEM) early next year. A GEM proposal had already been submitted to the State Council for approval and it is said that more than 1,000 domestic companies are eager to list on that board.

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