For most emerging markets, the arrival of foreign equity investors
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The $4.6 trillion market, where individuals account for about 80 percent of trading, has turned into the most volatile worldwide after Greece as local traders speculate on prospects for increased central bank stimulus. The benchmark index surged 2.9 percent today, erasing an early decline of 1.7 percent.
Chinese policy makers’ desire to increase the role of professional money managers with longer-term investment
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opening up to foreigners through programs such as the Shanghai-Hong Kong exchange link, according to HSBC Jintrust Fund Management Co. and Bocom International Holdings Co. The recent surge in volatility is adding urgency to that push, says John-Paul Smith of Ecstrat.
“The market overall is in a bad shape right now, you have huge swings which are hard to predict,” Smith, founder of the London-based investment
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The trading approach of Zhang Jing, a 30-year-old private investor
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Exchange Link
“It doesn’t really matter if the company’s fundamentals are good or not,” she said.Some 760 miles to the south in Hong Kong, Ronald Chan takes a different approach. The money manager at Manulife Asset Management, who helps oversee about $269 billion and plans to invest
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The exchange connect allows overseas investors
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China has also expanded its so-called QFII and RQFII investment
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New Investors
“The government is highlighting the importance of bringing in institutional investors,” Zhu Haibin, the chief China economist at JPMorgan Chase & Co., said in an interview in Beijing. “Hopefully that will reshape the investor base in the stock market
Participation in the exchange link so far has been tepid. International investors have used about 28 percent of the daily quotas of net buy orders allowed through the program, according to data compiled by Bloomberg.
Concerns over ownership rights of shares bought through the link and a requirement for international investors to deliver stocks to a broker before markets open if they plan to sell have curbed participation, according to the Asia Securities Industry & Financial Markets Association.
Relative Valuations
Share prices can be volatile even in the most developed markets such as the U.S., where individuals comprise less than 15 percent of trading according to Tabb Group. The Standard & Poor’s 500 Index (SPX) dropped as much as 1.3 percent yesterday before ending the day little changed.Price swings in the world’s biggest equity market are still about one sixth the size of those in Shanghai, according to a 10-day reading of historical volatility compiled by Bloomberg. The S&P 500 is valued at 16 times estimated earnings for the next 12 months, versus a multiple of 11 for the Shanghai Composite.
As overseas professionals take larger stakes in Chinese companies, they’ll also push corporate executives to improve the way they treat minority shareholders, said Jerry Feng, the Shanghai-based head of QFII advisory at HSBC Jintrust. China ranked ninth out of 11 Asian nations for the quality of corporate governance in a September survey by CLSA Ltd.
A single overseas investor is allowed to hold as much as 10 percent of a company listed in China, with aggregate foreign ownership capped at 30 percent.
“The shareholder structure will impact corporate governance,” Feng said. “We are on the right track, but the process will be long.”
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