expectations was high in November, when the Shanghai Stock Exchange established Stock Connect, a direct link with the Hong Kong Stock Exchange. Until then, only large, selected institutions released into the tightly controlled market. Now, investors around the world for the first time have the chance to buy A shares in Shanghai and the Chinese people have the opportunity to trade on the Hong Kong Stock Exchange. The result after three months have been poor. But observers see it anyway as China takes big step towards a more open economy.
– China has never been so close to fully open up to now. It is an extremely interesting time, says Amy Yuan Zhuang, China Analyst at Nordea.
China began right its fifth year as the world’s second largest economy, but in the world of finance, the country remained a small players. Stock markets are young and characterized by restrictions, lack of transparency and high risk. Foreign ownership is low, the currency renminbi a marginal trading currency and IT giants such as Alibaba has chosen to list abroad. However, it is not lack of will, but rather the timing that have been reforms to procrastinate, said Zhuang.
– China was ready to open in the mid 90s, but then came the Asian crisis and the country shut itself even more, she says. In the mid-00s, they were ready again, but then crashed Lehman Brothers.
In conjunction with China joined the WTO in 2001 introduced the country’s first program to allow foreign institutions act on the leading stock exchanges in Shanghai and Shenzhen – QFII. The number of permits is, however, extremely limited, as the quota each trader may trade for. The Stock Guide, anyone can shop at the Shanghai Stock Exchange by brokers in Hong Kong. Even here there are quotas, which act as a safety valve for the Communist Party should it want to strangle the program. Initially, there was concern that the limits of how much that got traded was too low, but the transactions thus far has proven to be below the ceiling by a large margin.
– The beginning has not been overwhelming, but I think it is healthy, says Sally Wong, president of the Hong Kong Investment Funds Association. The program is new and it will take time for investors to understand how the market works, what the system does and what the nature of the risks and returns have.
To some extent restraint on technical issues but also that the stock market is still so unstable. Private speculators account for most of the trade and there is not the same transparency in the corporate balance elsewhere.
– We allow managers in China to make significantly larger deviations from the index in comparison to other markets. It’s a very inefficient market, says Tomas Franzén, chief strategist at the Second AP Fund, which made transactions through the QFII the past two years.
International players seems however become more comfortable with the new link. In December Luxembourg eased its restrictions to use Stock Connect. After China announced that the country will also open a direct link to the Shenzhen Stock Exchange, where most IT companies are listed, there are also hopeful that the leading index funds will soon include China A Shares. It would give a real boost for the foreign trade.
– Getting A shares included in the MSCI is definitely behind China’s drive with Stock Connect, says Amy Yuan Zhuang. Most agree that Chinese shares are undervalued, especially if the market is going to be liberalized.
The goal of becoming a financial superpower and make the currency renminbi to the world’s reserve currency is however still far away. Amy Yuan Zhuang believes that reforms will be done slowly to ensure there are no bubbles in the system ruptures.
– There are concerns about the increased exposure will affect China, she says. Many parts of the economy are inefficient and interconnected: the banking sector is dependent on its monopoly, there is a property bubble. There is much speculation that President Xi will intensify its work this year. But they also want to feel that they have control.
To Beijing sometimes has only limited control became clear last fall. The protest movement Occupy Central rumored to be behind the delay of Stock Connect, as a sort of punishment for Hong Kong’s instability. Others have hit back, saying that China exploits the city’s position as an international financial center.
“China has turned Stock Connect to a ‘blessing’ for Hong Kong, but the drama surrounding the link only shows that China needs to Hong Kong more than we need them. Therefore, we must learn to strike this vital part! “Reads an article in the Beijing Critical magazine Passion Times.
A few weeks later Stock Connect launched and occupiers driven away.
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