Subprime blues hurt China shares
goal By Olivia Chung
HONG KONG - The US financial crisis
stemming from subprime mortgage defaults is
claiming another victim - the Chinese government's
policy of encouraging its citizens to trade in
overseas shares to help curb excess liquidity in
the economy and dispose of some of the country's
ever-growing foreign reserves.
Individual
Chinese can invest in overseas stocks indirectly,
mainly in those listed in Hong Kong, through the
Qualified Domestic Institutional Investor (QDII)
scheme. All QDII funds launched so far are
reporting losses and the scheme appears to have
lost its attraction to small investors as they
watch markets falling in reaction to the US
subprime mortgage crisis.
The sluggish
overseas markets may also be a reason for Beijing
virtually shelving indefinitely the so-called
"through train" program
that it
intended would allow individual Chinese residents
to trade directly in Hong Kong stocks.
With residents shunning overseas markets,
the government may concentrate more efforts on
boosting the domestic market.
Liu
Mingkang, chairman of the China Banking Regulatory
Commission (CSRC), said while attending the
ongoing annual session of the National People's
Congress (NPC), which opened on March 5, that no
timetable has been set for the through train
program as further studies are needed.
That is dashing the hopes of investors in
Hong Kong who looked to benefit from the program
through rising share prices as mainland investors
bought stock in Chinese companies they were
familiar with, often through their dual listing in
Hong Kong and Shanghai.
After it was
announced on August 20 last year, the through
train program helped push the Hong Kong benchmark
Hang Seng Index up as much as 55%, until Premier
Wen Jiabao said on November 3 that the government
needed to assess risks to the stability of Hong
Kong's financial system before letting the train
through.
The index has now tumbled more
than a quarter from its record high close of
31,638.22 on October 30, although investors in
Hong Kong still cling to the hope that the through
train scheme will be given the go-ahead. Huang
Xingguo, the mayor of Tianjin, the city near
Beijing that was designated to host the initial
trial of the through train scheme, assured
investors on Sunday that its pilot program is on
track, Asia Pulse reported.
"There's a lot
of preparation involved. Risk assessment and
research is under way to open the door for
mainlanders to invest in the Hong Kong stock
market," Huang said. "The project is going
smoothly, but timing depends on central government
approval."
The scheme will be an effective
way to bring in conversion of the yuan via capital
accounts, Guo Qingping, chief of Bank of China's
(BOC) Tianjin branch, said on the sidelines of the
NPC session. BOC was originally expected to be the
only financial institution providing the program,
but Guo said the details are still being ironed
out.
Liu Shantong, a researcher at the
Institute of Finance and Banking at the China
Academy of Social Science, expected Beijing would
not initiate the scheme for two years as further
liberalization of the country's capital controls
was not likely amid the expected US economic
slowdown.
The poor reaction to the QDII
scheme, the only existing legitimate channel for
mainland investors to buy overseas equities, will
also serve as a brake on implementation of the
direct-purchase through train.
"The
lukewarm reaction from mainland investors will
eventually affect the amount of capital flowing
into Hong Kong from the mainland," Lu Hao, an
analyst at Haitong Securities in Shanghai, said.
China International Capital Corporation
(CICC), the mainland's first investment bank to
launch a QDII fund and which started accepting
cash on January 16, received subscriptions worth
372 million yuan (US$52.2 million) from 1,585
investors in 36 days, far below its target of $5
billion yuan, it said on March 2.
This was
barely more than 1% of the amount raised by the
first four QDII products run by mainland fund
managers last year, which on average netted about
30 billion yuan each. Of these four funds,
Shenzhen-based China Southern Fund Management
attracted 50 billion yuan in subscriptions on its
September 12 launch day alone, far exceeding its
quota of 15 billion yuan.
"Despite the
CICC fund's flexibility in equity investments, the
response by investors - 372 million yuan and 1,585
clients - clearly indicates that they have lost
complete confidence in overseas stock markets,"
said an official at a fund manager in Shanghai,
who preferred to remain anonymous.
To
counter risks and allow the fund to share growth
when the stock market is bullish, the CICC fund's
proportion of equity investment can be reduced to
as low as 25% or raised to 95%, with up to 85%
invested in Hong Kong-listed shares.
As of
February 28, the per-unit share net asset value of
the first four QDII products had fallen by between
14 and 23%. Harvest Overseas Fund reported a
per-unit net asset value of 0.767 yuan (all funds
were sold at one yuan per unit), China
International Fund Management Co's Asia Pacific
Advantage Fund 0.792 yuan and Huaxia Global
Selected Stock Fund 0.82 yuan, and Southern Global
Selected Stock Fund 0.858 yuan.
"Once the
US - the world's biggest economy - goes down, all
are affected and so is China," Lu said. "Besides a
tightening monetary policy, China tends to
implement more conservative capital controls in an
attempt to reduce the impact brought by the
subprime mortgage crisis in the US."
Lu
expected that between $30 billion and $40 billion
will flow to Hong Kong stock market from the
mainland via the QDII program this year. CLSA
Research said last September that up to $45
mainland funds could flow into the Hong Kong stock
market between October 2007 and March 2008 under
the QDII scheme and through train program.
Given retail investors' present low
interest in outbound investment, Chinese
authorities are expected to concentrate more on
expanding the domestic yuan-denominated A-share
market to help absorb more money from the
country's economy, with officials talking about
allowing overseas incorporated and listed
companies, particularly red-chips, to make A-share
initial public offerings (IPOs) this year.
Red-chip companies are mainland companies
incorporated and listed overseas with their main
businesses are based on the mainland. Such
companies, which include Hong Kong-listed
telecommunications giants China Mobile, China
Unicom, China Netcom and the country's biggest
offshore oil producer, CNOOC, are regarded in
China as foreign companies and so at present are
not allowed to sell A shares on the Shanghai or
Shenzhen exchanges.
Yao Gang, the newly
appointed CSRC vice chairman said, on his first
public appearance in his new capacity on February
28, that the the regulator is studying how to bend
the current rules so that red chips and foreign
companies can sell A shares at home.
"Last
year, China stock markets continued to grow and
attracted the largest number of initial public
offerings in the world. If the stock markets
continue to grow, the scale of fund raising will
keep on rising," he said.
About 772.8
billion yuan was raised on the domestic market
last year, according to the CSRC.
"We will
be focusing on pushing forward red-chip companies
and foreign firms to list on A-share markets,''
CSRC chairman Shang Fulin said earlier.
Shang did not give a timetable for
domestic IPOs by red chips, many of which have
indicated interest in entering the A-share market
this year. Larry Yung, chairman of Hong Kong
listed red-chip Citic Pacific, a
property-to-metals group, said on March 3 that the
company hoped to sell A shares this year. CNOOC
chairman Fu Chengyu said he hoped to list on the
mainland next year as he did not foresee any major
regulatory obstacles to such a move.
Olivia Chung is
a senior Asia Times Online reporter.
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