What is your outlook for A-shares this year?
2013 will prove to be an active year for the equity capital markets, both in China and Hong Kong. The continued financial reform is expected to provide more support to the private sector, so the flow of capital will improve.
From a sector point of view, urbanisation will continue to be the dominant investment theme, which will benefit areas including construction, infrastructure, low-income housing, retail, transportation and services. That would be the focus for most investors.
The government has expanded the quota for the QFII [qualified foreign institutional investors] to increase supply of capital and that should help improve the stock market’s performance.
The new leadership in China will inject new momentum into economic reforms and growth, and that will be felt in the capital markets too. We estimate the Shanghai stock index will reach 2,400 to 2,500 points this year.
At this time last year, J.P. Morgan predicted that China stocks would remain a bright spot as an investment destination in 2012. What went wrong?
Early last year, people had high hopes for China as an investment destination — the US and European markets were largely uncertain at the time. However, when China lowered its economic growth target in March, the market was heavily clouded by worries of a hard landing, which triggered a wave of fund withdrawals from the A-share market. The third round of quantitative easing in the US has made China slow the pace of loosening fiscal policies, which resulted in a draining of liquidity.
Also, the revelation of a massive backlog of 800-plus IPO hopefuls in China became an overhang on the A-share market, which further dampened investor sentiment. These were unexpected events.
China has tightened controls on IPOs. How effective will the measure be in terms of relieving the backlog?
Putting more onerous responsibilities on IPO underwriters is a move in the right direction, and it would definitely improve due diligence quality in the IPO process. It will also help detect potential issues with IPO candidates, weeding out the weaker ones and postponing some to a later stage.
All these measures would no doubt improve the quality of the companies that go public, reducing the overhang and relieving the backlog. Improving the quality of IPO candidates has a profound impact on the overall health of the domestic capital markets as well.
Do you expect to see a big number of B-share companies move their listing to Hong Kong this year?
Yes, we see this as a positive trend and are expecting more B-share companies to convert themselves to H-share listings. The B-share market itself has been dormant for a long time with no new listing and no real institutional investor following at all. This latest move provides a new lease of life for the B-share companies, some of which are of very high quality. Those that have the desire to move to the H-share market will have to meet the H-share listing requirements imposed by the Hong Kong Stock Exchange, which is a higher bar.
How should China attract more institutional investors to the A-share market?
Although the Chinese stock market is still in its early stage of development and you’d expect many bumps along the way, the progress has been significant. The balance between institutional and retail investors will improve as China’s asset management industry develops.
What about the bond market? What progress is needed there?
The development of China’s bond market is just as important as its equity market as the country continues to push for financial reform.
First of all, companies in China need to have a deeper understanding that, in addition to bank lending, the bond markets also offer very attractive sources of funding.
Second, investors in general need to have better insight into the nature, the complexity and the functionality of China’s bond markets.
Third, there’s a need for China to establish a reliable and independent credit-rating system. The current credit-rating practice in China is still ineffective and lacks transparency.
Last, but also the most critical element, China also needs to streamline the regulatory system that governs the domestic bond markets. Currently there are different agencies overseeing different type of bond issuances, which fragments the markets.
