Strict regulations are deterring fund managers from capitalising on the opening of China's yuan-deno...
Strict regulations are deterring fund managers from capitalising on the opening of China's yuan-denominated securities market to foreign investors.
The China Securities Regulatory Commission has announced that vetted foreign investors will be permitted to make yuan purchases of initial public offerings, rights offerings, convertible bonds and mutual funds.
The country has kept 90% of its $500bn equities market, the second biggest in Asia after Japan, closed to foreigners for the past decade. But the closed proportion is expected to rapidly diminish with the changes, spurred by China's 2001 WTO entry.
However, Gartmore China Opportunities fund manager Philip Ehrmann says foreign funds are unlikely to snap up many immediate opportunities.
'Come back to me in two or three years' time and I will not be surprised if I find myself telling you a significant part of the fund has moved into these securities,' says Ehrmann.
'This is a very encouraging first step but until there is an easing of foreign investor approval criteria, lower valuations and improved transparency, there is little imperative for us to take advantage.'
In the meantime, he adds, funds will continue to concentrate on Chinese listings in Hong Kong. These have an average P/E of 10-15 times, compared to the 38 average of yuan-priced A-shares listed in Shanghai.
To become a qualified foreign institutional investor (QFFI) in the A-shares market investors must have $10bn in assets.
They must also be willing to invest not less than $50m and not more than $800m in Chinese securities. Ehrmann adds: 'Among other hoops and hurdles to jump through, QFFIs are expected to tie up capital for in excess of 12 months and we are not keen to do that.
'When one looks at the A-shares it is often difficult to work out exactly what business the companies are in. They tend to be speculative stocks driven by rumour and a degree of price momentum more than anything else.'
Devan Kaloo, an Aberdeen Asset Management Asia invest- ment manager, is more up- beat about A-shares' quality. B-shares, which are already accessible to foreigners, but at a premium, often signify state-owned 'smokestack' industries with convoluted shareholder structures, says Kaloo. 'They have often listed primarily just to extract money from foreigners,' he adds.
In contrast, A-shares often come from better quality start-ups run by Chinese entrepreneurs, he says, adding that A-share P/Es have soared because Chinese investors have been prohibited from buying into Hong Kong or foreign stock markets and have therefore piled into domestic exchanges.
However, the Chinese government is considering changes to this law which could prick the A-shares bubble as early as this year.
Kaloo concludes: 'For now valuations are not in attractive regions and hurdles to entry for foreign investors are too high. But in the longer run, when we get comfortable with some of the quality on offer, the A-shares are going to offer a better slice of China.'
A-shares from quality start-ups available.
Regulatory change may make investment easier.
Alternative to Hong Kong stocks.
Strict rules on foreign investors.
A-share may be hit if regulations change.
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