China Opens Its Markets to World – World Says No Thanks

13-Dec-2016 Intellasia | WSJ | 6:00 AM Print This Post

Beijing wants foreign funds to come to China, but pricey markets and weakening yuan keep them away

If the Chinese government is hoping that a flood of foreign capital would solve its yuan troubles, they will have to wait.

Foreign capital has dribbled into the Shenzhen Stock Exchange since it was opened to all overseas investors last Monday. Foreign ownership of Chinese bonds remains a sliver of the total market even after Beijing removed the main curbs on purchases by global fund managers.

That’s dashed hopes for a surge in foreign investment to counteract persistent capital outflows from China, which have seen the yuan drop 6.3 percent against the dollar this year.

The People’s Bank of China (PBOC) has burned through $940 billion of foreign exchange reserves since mid-2014 as Chinese citizens moved money out of the country and the central bank defended its currency.

“They’re trying desperately to get foreign capital into the country,” said Chris Balding, associate professor of economics at Peking University’s HSBC Business School. “Unfortunately, I don’t think there’s the appetite.”

In addition to relieving pressure on the yuan, Beijing also hopes more foreign institutional capital will stabilise Chinese stock markets, which saw a spectacular boom and bust in the summer of 2015.

Opening China’s markets increases the likelihood that index providers such as MSCI and J.P. Morgan will include the country in their global equity and bond benchmarks, potentially attracting billions of dollars in capital.

That won’t happen for the Chinese bond market until late 2017 or later, said J.C. Sambor, deputy head of emerging-market fixed income at BNP Paribas Investment Partners, the asset management arm of France’s biggest bank. “All the stars will be aligned in one year,” he said.

One week ago, Chinese authorities threw open the doors of the Shenzhen Stock Exchange to foreign investors, expanding access beyond the hand-picked group of fund managers that had access previously.

But foreign investors are not exactly pouring in. Net investment in Shenzhen reached no higher than 21 percent of the daily 13 billion yuan cap on stock purchases on any given day last week.

Overseas flows failed to reach 1 percent of daily turnover on the Shenzhen market throughout last week.

Offshore investors see Shenzhen stocks as pricey, and are turned off by the market’s lack of research.

And because the launch has been well flagged for many months, stocks have seen little lift from the opening.

“All of the catalysts have been priced in,” said Frank Tsui, fund manager of Greater China equities at Value Partners in Hong Kong.

At present, only those China stocks listed offshore (principally in Hong Kong and the US) are included in MSCI’s key benchmarks such as its emerging markets index, the most widely tracked gauge of developing market stocks.

MSCI has declined to include A-shares three times since 2014, each time pointing to offshore investors’ heavily restricted access to the market. With each market opening, expectations rise that MSCI might now include the stocks in its most tracked benchmarks, the Shenzhen Connect launch being no exception.

“With the Connect, we’re another step closer to MSCI inclusion in the emerging market index,” said Nicole Yuen, head of greater China equities at Credit Suisse.

Elsewhere, China’s government has attempted to attract foreign investors by opening its interbank bond market, where most of the country’s bond trading takes place, allowing unrestricted amounts of buying by foreigners. But take-up so far has also been slack.

Few debt managers have a deep knowledge of the onshore bond market, where pricing is distorted by the presumption among local investors that the debt of some firms carries implicit government guarantees, said BNP’s Sambor.

“It won’t be easy for global emerging-market managers” to get set up to trade this market, he added.

Even getting access to accurate data means putting aside beloved Bloomberg terminals and learning to use the Chinese counterpart, Wind Information, which is mainly in Chinese.

Overseas investors increased their holdings of Chinese bonds to 747.13 billion yuan as at the end of November, compared to 554.2 billion yuan at the start of the year, according to Wind. But that’s a mere crumb compared to the size of the Chinese bond market, with outstanding debt of 63.6 trillion yuan.

It’s also done little to halt a sell-off in the past month, which saw yields on 10-year Chinese government bonds hit the highest level in more than a year last week. Meanwhile, the extra yield demanded by investors on corporate bonds over government debt rose to the highest level in almost 18 months.

That said, a slow and steady launch for Shenzhen stocks and bond market trading may be what Beijing wants. The start of a similar trading link with the Shanghai stock exchange in 2014 was followed within months by a stock buying frenzy as state media encouraged investors to dive into the stock market, ending in an enormous crash. Regulators could be forgiven for hoping for less excitable investors this time around.


Category: China

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