Bearish trend widely seen to have just begun as Shanghai index dips

SHANGHAI - Although she is a veteran investor with over 20 years of experience in the China market, Qian Li, 81, is at a loss to explain how she could have lost nearly 40 percent of her 350,000 yuan ($51,231) investment in the past two weeks.

All but one of the 14 stocks she holds had tumbled. "I was dumbfounded," she sighed. The latest stock market slide began on April 17, the day when the government announced a batch of measures to cool the property market. On that same day, trading in stock index futures was launched.

"We suspect that the property cooling policies and index futures trading are both bearish factors," said Wang Jianrong, who described himself as a professional investor. "But we can't figure out which one is having the biggest impact," he said.

The Shanghai Composite Index has shed a total of almost 20 percent since April 16 and the bearish trend is widely seen to have just begun. Wang and others said they were particularly worried by the opening of the index futures market to foreign participants that could bring in a hoard of financial marauders from New York, London and other financial centers.

The latest Sino-US Strategic and Economic Dialogue agreed to allow qualified foreign institutional investors (QFIIs) to invest in the mainland's stock index futures market, which stirred heated debate among investors and experts. Many investors and commentators prophesized that domination by foreign players could change the rules of the game.

Stock analysts and economists have remained sanguine, arguing that foreign capital could help enhance market liquidity that's essential to futures trading.

Under the new agreement, QFIIs and foreign joint ventures will be allowed to invest in China's stock index futures market.

"I cannot believe the government is going to introduce foreign institutional investors to the stock index futures market. In the worst scenario, our stock market will be manipulated by QFIIs," Wang said.

The decision to invite QFIIs into index futures received a positive response from foreign institutional investors. "We would be interested in trading A-share futures for both efficient portfolio management and where we cannot obtain exposure through traded securities," Janet Tsang, a client portfolio manager at JP Morgan Asset Management, said.

"That said, A-share futures would not form a core strategy of any of our products as JP is a bottom-up stock picker and it's unlikely we will launch a new product which uses A-share futures as the primary investment instrument", Tsang said, adding that JP Morgan will participate in index futures trading "either for hedging or obtaining market exposure, for example, when a product doesn't have QFII quota while JP Morgan is hoping to get some A-share exposure", she said.

Tsang said that the opening of the index futures market to foreign participants is positive for JP Morgan in two ways: First, it will provide easier access for JP Morgan to the A-share market; second, it will afford the asset management house easier downside management.

However, Tsang added that in the process of opening mainland index futures to foreign players, market liquidity will be the paramount issue.

Cao Fengqi, director of the finance and securities research center at Peking University, said concerns about QFIIs' control of China's stock market are largely unfounded. He noted that the real reason behind the recent stock market fall is uncertainty about the current economic recovery and possible adjustment of the government's currency policies.

Allowing foreign investment in the index futures market is "a kind of concession", Cao said. "If you want to play a greater role on the global economic stage, you have to allow more foreign capital into your market. But I think opening the stock index futures to QFIIs is a gradual process," Cao said.

"We won't see a sudden influx of foreign capital into our futures market due to the quota limitation, and this gives domestic investors time to become more experienced and mature," Cao added.

Hu Yuyue, head of the securities and futures institute of Beijing Technology and Business University, agreed that QFIIs' access to China's index futures market is a natural result of China's capital market development.

"China's commodities futures market has become the largest worldwide. But if the futures market continues to ban QFIIs, it won't become a real international market that has the pricing say," Hu said.

"By limiting the investment volume, the Chinese government will have good control of QFIIs' influence and their possible impact on stock index futures," he added.

Hu refuted the claim that the stock market was hurt by newly launched index futures. "The mainland stock market has more than 60 million registered investors, and they have invested trillion of yuan. On the contrary, only 26,000 people opened index futures accounts with an aggregate of no more than 3 billion yuan," Hu said.

Hu said the recent tightening policy towards the overheated housing market led to the sharp fall in the stock market. "There is market speculation that the favorable monetary policies will come to an end, and the central bank is tipped to raise interest rates later this year," he said.

China Daily

(China Daily 06/18/2010 page17)