Foreign investors start to fear China's stock market bubble(2)

2015-04-28 09:24China Daily Editor: Si Huan

For international investors like NN Investment Partners, which have traded on the H-share market for years, Shanghai-Hong Kong Stock Connect provides them with a great opportunity to tap into China's A-share market.

But at the same time, Shanghai-Hong Kong Stock Connect has also caused a certain degree of nervousness about the quality and transparency of the A-shares the policy is now giving foreign investors access to, as these A-shares may not necessarily have the same disclosure standards as H-shares.

"There is a feeling that the investor relations of some of the mainland companies are not so sophisticated, and that they have not dealt with overseas investors before. They may not have accounts in English, or may not release their press releases in a timely manner," Davis says.

These concerns, combined with the relatively unfamiliar landscape of the A-share market for foreign investors, have meant that many Western investors are cautious about how they tackle opportunities in China's A-share market.

"The Western investors won't know the companies, and they may not have Mandarin teams to communicate with these companies. But if you talk about the long run, this channel presents a big opportunity for overseas investors to tap into China's growth," Davis says.

Davis' views are echoed by William Fong, Director of Asian Equities at Baring Asset Management. Fong is also manager of the Baring China Select Fund, which invests in A-shares through the QFII route.

Fong says that a key limitation of the Shanghai-Hong Kong Stock Connect policy is the difference in settlement times between Hong Kong traders and traders in the Chinese mainland when buying and selling the same stocks. Settlement time in Hong Kong is T+2, meaning stocks exchange hands two days after a trade is placed, where as in the Chinese mainland it is T+0, meaning same day settlement.

The second limitation of Shanghai-Hong Kong Stock Connect is a daily quota of how much trade can be conducted, meaning it will not accommodate trade volumes above the set limit. Such a limit will affect the potential opportunity this market can bring for international investors.

"We are constantly communicating our needs and concerns with the Hong Kong regulators, and we hope that in the future as Shanghai-Hong Kong Stock Connect becomes more popular, hopefully it will become more effective and transparent in the future, " he says.

Jan Dehn, Head of Research at Ashmore, an investment manager headquartered in London, says that overall opportunities for foreign investment managers to access China's growth are still rather limited.

"Until the markets are opened further, China remains an 'exogenous variable' to most investors. They only look at the growth number and then they deduce what this means for commodity demand and global growth. It is an indirect relationship," Dehn says.

Meanwhile, the price increases of Chinese A-share market has led to a reduction in the number of Chinese firms wishing to list on overseas stock exchanges, Duan says.

"Instead of listing overseas, many Chinese firms are now more willing to list in the domestic market because they would find it easier to raise capital due to positive investor sentiment. The Chinese government's attempt to encourage stock market growth has also led to an increase in the number of firms they are giving listing approvals,"he says.

Whereas a few years ago many firms need to wait for years before they can list on the A-share market, approval processes are getting quicker now. It seems the Chinese government hopes the growing IPOs can help absorb the surplus of capital on the market, he says.

The optimism seen in Chinese stock markets have also generated more discussions around the issue of China potentially establishing a foreign board to list international firms.

"It may happen in a few years although not immediately. Such a board would give Chinese investors more choices of companies to invest in, and help the Chinese stock market to become more international,"Duan says.

Dehn also says that it makes sense to introduce a foreign board. "There are huge savings in China and the more assets savers have access to the better. Hence, introducing access to foreign stocks in China is a good idea. This will allow global companies to list in China, will improve the status of the Chinese yuan and deepen China's capital markets further."

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