China Herald: Up to 50 bn US$ in capital waiting to enter A-share market

Ben Cavender

China´s stock markets get a setback as global stock-index compiler MSCI decided to delay inclusion of China at least still next year. Reason: the current 5% foreign participation is too low. But business analyst Ben Cavender expects China to open its market further this year and an estimated 20-50 billion US dollar in capital to enter the market next year, he tells Money Control.

Money Control:

Latha: I am sure you are looking at the way China is progressing on these matters. Is China poised to increase foreign participation beyond this 5 percent very rapidly?

A: It seems like they are moving in a direction and maybe more quickly than people might think. Last year we had the Shanghai, Hong Kong Stock Connect programme open up. Looking at the Q1 this year we are going to see the Shenzhen market open up probably in a similar way. Since the last year they have increased quotas about 50 percent. So they are clearly making steps to move in that direction. The question is how long is it going to take for them to kind of get the rest of the weigh and I wouldn’t be surprise if we see that happen even within the next 6 to 8 months.

Sonia: Do you see China continue to outperform market like India and what do you think could be the extent of the fund flows that move into the China A-shares once they get included?

A: Looking at A-share market, we have seen a tremendous run-up over the last year. Shanghai is trading at 20 times earnings; Shenzhen is close to 60 times earnings. So in some sense shares are not undervalued in China any more. So from an institutional investor perspective they might be initially cautious but if they have to track emerging market indexes and China is included - I could see that leading to anywhere from USD 20 billion to USD 50 billion coming into the China market if quotas are relaxed, so a lot of money.

Latha: China is already battling a slowdown internally or at least even mildly encouraging it. If you have this kind of money coming in then there is a problem of Chinese yuan appreciation. Do you think China for separate reasons could go slow on allowing so much of money to come in one shot?

A: I could see them trying to slow things down, little bit control the situation but at the end of the day I think they have more gains in opening market up by bringing in institutional investors would probably stabilise the A-share market to some extent and one of the issues we have is the market driven right now by retail investors who are gambling about things going to happen in the future. So bringing in some special investors could calm things down.

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