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China Plans to Raise Stock Investment Levels by Equity Funds

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April 29 (Bloomberg) -- China’s securities regulator plans to raise the minimum proportion equity funds should have in shares, a move that may drive investments into the worst-performing major Asian stock market in the past year.

A stocks fund will be defined as one that holds more than 80 percent of its assets in equities, according to revised industry rules posted on the China Securities Regulatory Commission website. That compares with 60 percent now. The CSRC also plans to amend its rules so that a fund’s total assets can’t exceed 140 percent of its net assets.

“It will definitely be positive for the stock market” in the long run, said Daphne Roth, Singapore-based head of Asia equity research at ABN Amro Private Bank, which oversees about $207 billion. “But this is a multi-year project and it’s still in its early days. I am still cautious on China stocks, as we may see downgrades in some company earnings.”

Chinese stock markets are shut for public holidays and will reopen on May 2. The benchmark Shanghai Composite Index has tumbled 11 percent from its 2013 high on Feb. 6 amid signs that the economy’s recovery is stalling. The nation’s industrial profits growth fell in March from the first two months, as banks from Goldman Sachs Group Inc. to JPMorgan Chase & Co. cut their estimates for full-year expansion.

Historically, stocks funds invest 80 percent-90 percent of their holdings in equities, and currently 13.5 percent of the funds invest less than 80 percent, the Securities Times reported on April 27, citing an unidentified CSRC spokesman. The South China Morning Post said the change of rule could theoretically inject 200 billion yuan ($32 billion) into the market, without citing anyone.

‘Small Amount’

The CSRC is soliciting comments and suggestions on the proposed changes until May 26. Hao Hong, managing director of research at Bank of Communications Co. in Hong Kong, estimates the new plan would add “a very small amount” of 30 billion yuan, based on his calculations, compared with daily trading volume of about 100 billion yuan.

“The authorities seem to be rather anxious to talk up the market,” Hong said in an e-mail interview today. “Such moves can be perceived by the market as the urge to rush out initial public offerings. If so, it will be a drag on the market, rather than help.”

The CSRC suspended issuance of IPO shares in October, as investor appetite for new stock waned amid equity-market declines that dragged the Shanghai Composite to near four-year lows. China had started a first round of spot checks on companies seeking listings, Shanghai Securities News reported on April 10, citing unidentified people.

The nation’s domestic stock market is valued at $3.06 trillion, making it the world’s fifth largest, according to data compiled by Bloomberg.

Separately, a CSRC spokesman said in a press conference on April 26 that overseas strategic investors, or Qualified Foreign Institutional Investors, aren’t selling shares on a large scale, even as they downgraded their view of the Chinese economy and market, according to the Securities Times.

To contact Bloomberg News staff for this story: Helen Sun in Shanghai at hsun30@bloomberg.net

To contact the editor responsible for this story: Shiyin Chen at schen37@bloomberg.net

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