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China to be liberal in capital markets reform

Thursday, 26 January 2012 | 00:00
If the markets were as predictable as Feng Shui forecasts, the new Chinese ‘black water dragon year' may well be ‘dragon-shaped' !
While tongue-in-cheek forecasts insist that the first half of the year will have a slow start like the "dragon sinking back into its lagoon," the tipping point for the markets will come in August, as the mythic creature swiftly raises its head. It's a different matter, that the Shanghai Composite defied such ‘forecasts' and actually showed an upward trend last week.
In a bid to encourage a sluggish stock market and a slowing economy, Chinese regulators are not depending solely on grandiose macro policies, but have opened up fresh strategies to encourage an inbound investment and inject fresh funds into the market.
Pension flank
A big breakthrough for the stock market will come if the State Council, China's Cabinet, approves a proposal to allow local governments to allocate some of their pension funds into shares. If cleared, the move would be a path-breaking step, especially with the Shanghai Exchange losing a quarter of its value in the past nine months.
The deeply conservative National Council for Social Security Fund (NCSSF), which overseas pensions, has been exploring ways to boost returns on worker pensions. China's pension funds — mostly managed at the local level — struggle to retain the value of their holdings as they can invest only in safe bank accounts and government bonds. This often means negative returns when adjusted for inflation.
However, in December, NCSSF announced its willingness to pool together part of the pension funds managed by provincial and city governments and invest some of it in stocks. The proposal could see 10 to 20 per cent of pension fund assets gradually being funnelled into the stock market, the volume of which could be as much as $57 billion (Dh209.64 billion), according to estimates.
This year, China will also be more liberal in opening its strictly restricted capital markets to foreign investors. It recent months, it eased rules to accelerate the pace of inbound investment, with the China Securities Regulatory Commission approving 14 foreign institutions to invest in the capital markets in December 2011, which is a record in itself.
Foreign institutions can buy Chinese stocks and bonds under the Qualified Foreign Institutional Investor (QFII) quota. The State Administration of Foreign Exchange (Safe), China's foreign currency regulator, has speeded up these approvals, having granted nearly $1 billion in QFII quotas since October.
A significant development in this sector was the permission to four government investment agencies — Bank of Thailand, Kuwait Investment Authority, Bank of Korea and the Korea Investment Corp — to enter the markets in December.
Foreign investors are also clamouring to grab a piece of the $350 billion mutual funds industry here. Lured by long-term growth prospects in what is now Asia's second-biggest fund market, foreign investors are desperate to gain a toehold.
Although the mutual fund sector is stumbling at present due to a sliding stock market and didn't perform too spectacularly last year, foreign entrants are ready to pay hefty premiums to come aboard.
The sector is estimated to hit $10 trillion by 2030 and the possibility of China's massive savings and state pension funds flowing into the capital markets makes this an appetising sector with generous long-term growth potential.
Foreign entities such as Power Corporation of Canada and Japan's Mitsubishi UFJ Trust and Banking Corp have recently struck deals with Chinese money managers. Overseas funds can operate in China via joint ventures, in which foreign stakes are capped at 49 per cent.
Of China's 66 fund houses, more than half are Sino-foreign ventures, with 13 foreign investors, including Deutsche Bank, Morgan Stanley and Manulife Financial, having entered the market through acquisitions.
While the going looks promising for capital market liberalisation as of now, the possibility of the heavy hand of regulation halting the pace of reform is never far away in China.
Source: Gulf News
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