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Ray Chan

Trust can be destroyed in an instant, while it can take decades to build.
In the wake of the MSCI decision to exclude China’s A shares from its global benchmarks, Beijing’s flurry of market-boosting measures last week have raised further questions about the central government’s commitment to let the market play a decisive role.
Institutional investors have been unanimous in their opposition to the measures by Chinese policy makers to prop up the market since these liquidity injections create a potential moral hazard and could deal a blow to the slow-moving reform of the pivotal financial sector.
“Does the Chinese stock market ever make any sense?” said Ai Mee-gan, an investment manager at Aberdeen asset management which, like many other global investors, accessed the mainland market via the quota system, not through Hong Kong-Shanghai Stock Connect.
“It is seen as a step backwards in financial reform,” the Singapore-based manager said. “Those intervention measures are not an ideal way to stabilise fears of margin calls.”
In theory, a long-planned overhaul of the financial services industry, which is dominated by a handful of large and powerful state-owned lenders, aims to remove entry barriers and liberalise market mechanisms, transferring power away from vested interest groups into the hands of market participants.
Besides lofty valuations of Chinese stocks, the lack of effective stock index derivatives and difficulties in borrowing stocks for short selling activities are seen as a number of key technical issues keeping global investors on the sidelines.
MSCI said in June its decision to defer inclusion of China’s A shares in its global emerging-market benchmarks for the second year reflected lingering investor concerns over market accessibility, as well as their capacity to buy and sell stocks freely and to complete the transaction in a timely fashion.
“China still lags significantly in freeing up key financial market prices, especially interest and exchange rates. Most commercial banks still behave more like state-owned enterprises than listed companies,” Huang Yiping, a professor at Beijing University, wrote in a report in January.
Chinese stocks represent only 1.7 per cent of the portfolio of major fund management firms, reflecting a dramatic underweight position, according to a June report by Morningstar, a US research group, after a survey of 200 fund managers.
China still lags significantly in freeing up key financial market prices, especially interest and exchange rates. Most commercial banks still behave more like state-owned enterprises than listed companies
Huang Yiping, professor, Beijing University
Leon Tucker, Fidelity’s head of equity research for Asia-Pacific, concurred, saying Beijing’s progress in reforming state-owned enterprises had been slower than most investors’ expectations, leaving them doubtful about the growth outlook for the world’s second-biggest economy.
As the stock rout continued, the People’s Bank of China said last Wednesday it would help the China Securities Finance Corp (CSFC), the only institution that provides margin financing loans to designated market participants in the financial markets, virtually putting an invisible support under the country’s stock markets, since the rally was primarily driven by retail investors using borrowed money.
China’s central bank also said its support for the CSFC would help reduce potential systemic and regional financial risks. However, the endorsement of China’s stock markets came at a price – scepticism from overseas investors closely watching Beijing’s muscular approach to propping up the market.
Early last week an unprecedented wave of support measures from the Chinese central bank, brokerages, and futures exchange operator at first failed to tame fears of a free fall in the stock market, but sentiment stabilised by the end of the week, lifting the Shanghai Composite to a weekly gain of 5 per cent.
Aberdeen’s Ai summed up the mood of international investors: “We’ll adopt a wait-and-see approach at the moment.”
In a bid to defend the country’s 25-year old stock market, the People’s Daily predicted the situation would stabilise. “Rainbows always appear after rain,” it said.


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Beijing’s flurry of market-boosting measures have raised further questions about the government’s commitment to let the market play a decisive role. Photo: Xinhua

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