Expectations are growing that the Chinese 'A' share market is to be opened up to foreign investors, ...
Expectations are growing that the Chinese 'A' share market is to be opened up to foreign investors, bringing the prospect of a 'B' share price rise.
The prospect of this change has already caused a massive rise in the 'B' share index since the start of the year, because opening up the market should push the two classes to parity. At present, 'B' shares trade at a discount to 'A' shares.
Anthony Neoh, chairman of the Hong Kong Securities and Futures Commission and advisor to the Chinese authorities, hinted in late July that the system will be changed into something more like that in Korea or Taiwan, with the existence of Qualified Foreign Institutional Investors certification.
Joseph Mariathasan, manager of CGU's Greater China fund, said: "China has a closed capital system, so it needs to control the amount of foreign investment in the country. The unusual 'A' share - 'B' share system, where foreigners had access only to the dollar and Hong Kong dollar denominated 'B' shares, fell flat.
"Institutional investors lost interest and now something like 60% of the 'B' share market is owned by Chinese that have managed to get hold of foreign currency.
"What has happened is that the 'B' share market has languished. There are 110 companies listed and they trade at a discount of up to 70%-80%. It is clear that they need to reform the structure. The 'B' share structure is not working."
If all shares become available on the same footing, it seems likely that there will be massive quantities of arbitraging as the both the heavily discounted 'B' shares and 'A' shares become equally accessible.
If it were this simple, of course, the market would already have discounted this news and 'A' and 'B' shares would be equally valued. Mariathasan, who is responsible for a 'B' share tracker, is happy at the prospect of a huge performance increase, but dubious about the timescale.
He said: "There have been similar announcements in the past and the market has risen only to find that nothing was going to happen."
Constance Wong, fund manager of the Lombard Odier Greater China fund, said: "Opening of the 'A' share market essentially means China is willing to open its capital account as well as floating the exchange rate. Although full convertibility is unlikely, we believe it will initially adopt a semi-closed capital account, similar to that of Taiwan. It is likely to introduce more flexibility to its currency, allowing a wider trading band.
"The opening of the capital market is in line with our expectations. We believe reforms will continue at a rapid pace given the marked improvement in macro-economic conditions in China. We maintain our overweight position in China, which represents over 10% in our Pacific Rim account and over 20% in our more focused Greater China fund."
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