Institutional investors’ dream of a single China equities market, deep in liquidity, reliable in regulation and transparent in compliance, might yet be some years away. But there is now a discernible trend within China’s confusingly fragmented equities markets towards these ultimate goals.
China’s equity markets remain confusing. In addition to the main Shanghai and Shenzhen markets, there are several benchmark indices based in Hong Kong, of which the H share index is arguably still the true China bellweather, not to mention indices comprising internationally listed companies, principally those trading on the New York Stock Exchange, on Nasdaq and on the London Stock Exchange.
Several factors suggest the positive trend. First, China’s macroeconomic picture is rapidly improving. A soft landing for the economy is now the most likely outcome of the government’s forced fiscal tightening; the reforms of the state-banking sector that are critical to China’s economic future might well be more advanced than many give them credit for [see New deals, old questions for China's bank investments, this issue]; and reform of the exchange rate and opening of the capital account, albeit slow, are moving in the right direction.
Second, stock market initiatives seem to be gaining traction. Proposals to achieve fungibility of different share constituencies within the A share markets (those officially reserved for domestic investors) are working. That will improve liquidity and, crucially, eventually shift the balance of power further away from state ownership towards the private sector.
The government’s qualified institutional investor (QFII) programme, which permits limited participation in the domestic markets by large international institutions under strict quotas, is having the desired effect: local markets are gradually being professionalized. An expansion of the QFII programme is long overdue, but its arrival is only a matter of when, not if.
The third factor is perhaps the most encouraging. There are signs of a re-rating of China’s domestic equity markets as they begin to assimilate the positive outlook. The long-moribund A-share indices of Shanghai and Shenzhen have suddenly come to life this year as investors, domestic and foreign alike, gain confidence and commit more capital. UBS, one of the largest QFII banks, and already bullish on H shares, is also touting selective investment in A shares based on the improving macro fundamentals, continuing share reforms and selective improvements in corporate governance.
Even the B share indices, those mainland Chinese-listed shares reserved officially for foreign investors only, have shown signs of life as speculation mounts, probably prematurely, that the two classes of share might soon be merged.
Much that could still go wrong and full reforms will take a long time yet to work through the system. But the prospect of fully fungible domestic equity markets in China is, at last, real.