Unleashing the Chinese Investor

China may be the spectacular growth story of our time, yet for all its might the country has an insular and undeveloped domestic equity market. Beijing invests trillions of state funds in international stocks, bonds, currencies, and hard assets. And Hong Kong, with its long ties to London, is a bona fide financial center. Yet mainland Chinese who want to be in equities are restricted to investing in domestic, yuan-denominated A shares on the Shenzhen and Shanghai stock exchanges, home to indexes that are prone to speculative mania.

“Mainlanders have only domestic-listed stocks, bank deposits, or real estate to pack their money in,” says Jun Zhu, an analyst who follows China for Minneapolis-based Leuthold Weeden Capital Management. “And cash is plenty. So you get inflated equity valuations, elevated housing prices—prices of everything, pretty much.” In 2007, when local markets were up sixfold in less than two years, the Chinese press was full of stories about retirees handing over their life savings to brokerage houses and students skipping meals to raise cash for hot initial public offerings. Shares whose prices closed on the lucky number eight were all the rage.