China took a “big step” toward opening its capital markets by approving stock index futures, paving the way for increased investment in the world’s fastest-growing major economy, according to Invesco.
The China Securities Regulatory Commission said yesterday it might take three months to complete preparations for index futures, agreements to buy or sell an index at a preset value on an agreed date. The government also approved margin trading and short selling, when investors seek to profit from declines in shares, according to a commission statement on its website.
“They’re taking a big step forward in developing their capital markets and allowing people to express their positive and negative views on stocks,” said Diane Garnick, a New York-based investment strategist at Invesco, which invests in China as part of its Asia-Pacific business that had $26.8 billion of assets as of September 30. “You’ll have more people participate in the market and thus greater efficiency.”
Increased investment in Chinese equities might help narrow the gap between prices of shares traded in both Hong Kong and the mainland, said Jeff Papp, a senior analyst at Lisle, Illinois-based Oberweis Asset Management Inc. Companies in China’s benchmark Shanghai Composite Index trade at 33.9 times 12-month trailing earnings compared with 20.9 times for the Hang Seng China Enterprise Index in Hong Kong.
‘More clarity’
“A potential long-term development is more clarity in the market now that there’s more liquidity in the market for the true valuations of the companies that are dual listed,” said Papp, whose firm oversees $800 million, including US and Hong Kong-traded China shares. “So we may see a pop” in the value of Chinese equities listed in Hong Kong, he said.
China, whose economy grew 8.9 per cent in the third quarter of 2009, currently bars overseas investors from trading yuan-denominated stocks and bonds on the mainland except through a so-called qualified foreign institutional investors programme, which has approved 94 international firms. Foreign ownership of fund management companies is restricted to 49 per cent.
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Index futures may help ease fluctuations in the world’s third-largest equity market by value after the Shanghai Composite Index doubled in 2007, then slumped 65 per cent in 2008 before rebounding 80 per cent last year. Until now, Chinese investors could only profit from gains in equities.
‘Freedom’
“China is going to the direction of freedom for its markets and more flexibility for its investors, so it’s good news,” said Eric Conrads, a hedge fund manager at Armada Capital SA, a Mexico City-based partnership with ING Investment Management, which invests in China through US-listed shares and exchange-traded funds. “More liquidity in the futures leads to more investors as you have a bigger pool of tools. You can be long on the future and short on the stock.”
Allowing short-selling in China probably would spur the start of more hedge funds in Asia, said Ken Heinz, the president of Hedge Fund Research Inc in Chicago.
Richard C Kang, the chief investment officer at Emerging Global Advisors LLC in New York said China, whose equities have a market value of $3.2 trillion, might not be ready for the change. Short-selling is when investors sell borrowed stock in the hope of profiting by buying securities later at a lower price and returning them to the shareholder.
“The risk that I see is too much growth too quickly,” said Kang, who helps oversee $50 million in exchange-traded funds that hold shares of China Construction Bank Corp, Industrial & Commercial Bank of China and China Life Insurance Co.