China’s effort to lure foreigners to its capital markets by almost doubling the amount overseas funds can invest sends a strong signal that the government is committed to reforms, according to Prudential Financial Inc. (PRU)
“This is one much more decisive move and sends a strong signal about what this government wants to do,” said Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential, which oversees more than $1 trillion in assets, including Chinese equities. “Little by little, they are opening up the market, paving the way for deeper reforms. The direction the authorities are taking is encouraging.”
The China Securities Regulatory Commission increased the investment limit for qualified foreign institutions to $150 billion from $80 billion, according to a statement July 12. It also will permit investors with yuan holdings in Singapore and London to invest in the Chinese market, expanding the so-called RQFII beyond Hong Kong for the first time. The Bloomberg China-US Equity Index of the most-traded Chinese stocks rallied 3.7 percent last week, paring its slump this year to 12 percent.
Authorities are opening the market as Premier Li Keqiang’s efforts to put the economy on a path to more sustainable growth spark the worst cash crunch on record and spur analysts from Goldman Sachs Group Inc. to Barclays Plc. to cut 2013 expansion forecasts. The Shanghai Composite Index fell to the lowest since 2009 last month as mining and banking shares tumbled.
The Bloomberg China-US Index fell 1.4 percent July 12 to 87.52. Yanzhou Coal Mining Co. sank the most in a month and China Life Insurance Co. tumbled after Finance Minister Lou Jiwei said growth as low as 6.5 percent wouldn’t be a “big problem.” Spreadtrum Communications Inc. (SPRD) surged to a record after getting a $1.78 billion takeover offer.
The iShares China large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., fell 2.8 percent to $33.21, paring its gain last week to 3.6 percent, still the biggest advance since January. The Standard & Poor’s 500 Index advanced 0.3 percent to a record.
Yanzhou, China’s fourth-largest coal mining company, tumbled 7.7 percent to $7.18 in New York. China Life, the nation’s biggest insurer, slid 3.9 percent to $35.67 to trade at the biggest discount over its Hong Kong shares in a week.
Spreadtrum, a mobile-chip maker, surged 13 percent to $29.76, the highest since trading began in 2007. Tsinghua Unigroup Ltd., a Chinese state-owned company backed by Tsinghua University, will pay $31 per ADR, 8.8 percent more than it offered last month for the Pudong, China-based company.
The Shanghai index rose 1.6 percent last week to 2039.49. The benchmark has retreated 10 percent this year, compared with an a 9 percent gain in the MSCI All-Country World Index.
China last increased the so-called QFII limit for Qualified Foreign Institutional Investors in April 2012 by boosting it to $80 billion from $30 billion. The regulators have assigned $6 billion in quotas this year, compared with $15.8 billion for all of 2012, according to the statement.
Foreign investors have only fulfilled $43 billion of the $80 billion quotas since China started to allow overseas investment through the QFII program in 2002, according to regulators. They account for 1.6 percent of China’s A-share stock market.
The quota increase will “attract more long-term foreign investment institutions to China’s market and promote the development of the capital market,” the statement said. The regulator also pledged to speed up the QFII and RQFII programs and improve the tax system to attract more foreign capital.
“It would definitely be a positive for the Chinese market,” Timothy Ghriskey, the chief investment officer at Solaris Group LLC in New York, which manages $1.5 billion, said in a phone interview. “The U.S. market is very open to global investing, investing from anywhere, so I think our trading partners should be similarly open.”
The Shanghai Composite Index jumped 1.7 percent the first trading day following the announcement of the increase of the QFII limit in April 2012. It then rose a further 6.5 percent during the next month, before falling 20 percent to a four year low in December.
This time, the market impact will be limited as the economic slowdown exposes financial risks in the system, according to David Poh, who helps oversee $113 billion as the regional head of portfolio-management solutions at Societe Generale’s private bank.
Growth in the world’s second-largest economy probably eased to 7.5 percent from a year earlier in the second quarter, from 7.7 percent in the first three months of this year, according to the median estimate in a Bloomberg survey of 45 analysts before data due today.
Economists at Barclays and Goldman Sachs are among those forecasting 7.4 percent growth this year, the slowest since 1990. Finance Minister Lou told reporters on July 11 in Washington that growth as low as 6.5 percent won’t be a “big problem,” suggesting the government may tolerate even a slower economy.
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