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China market may soon be a real deal

The country’s stock indices are rising as the prospect of a coherent market looms into view.

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.

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