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Stock market faces opportunity for fundamental change

By Zhang Ran (China Daily)
Updated: 2006-10-20 08:47

"By lowering the standards for institutional investors, including fund management companies and insurance companies managing long-term fund assets, the regulator aims to encourage long-term investment in the securities market," the CSRC said in a statement.

The measure is in line with China's intention to introduce more institutional investors to enhance the stability of a market that has so far been dominated by retail investors.

Along with the growth of institutional investors, a long-term investment culture is emerging.

As QFIIs enter the A-share market, new investment features have also been introduced to the domestic securities market.

"The fact that it takes a longer time for a QFII to set up a renminbi-denominated investment account than domestic investors means QFIIs have a longer investment/return turnaround in the securities market," said Daniel Zeng, chief investment officer with First State Cinda Fund Management Co Ltd.

A QFII, like a pension fund or a social security fund, has a longer investment/return term in the stock market usually three to five years and QFIIs tend to prefer investing in blue chips as they usually reflect the country's economic growth.

The Shanghai 50 index, comprising 50 major blue chips in the A-share market, rose by 3.2 per cent on the first day of trading after the week-long National Day holiday.

And the Shanghai & Shenzhen 300 index, composed of 300 blue chips, rose 2.3 per cent.

Both indexes exceeded the rising scope of the Shanghai composite index and indicated that market capital is flowing into blue chips.

The ICBC, the country's largest lender, will replace Sinopec as the biggest blue chip by issuing as many as 13 billion A shares on the Shanghai bourse. The bank is likely to attract more institutional investors seeking long-term investment on the A-share market and wanting to take a share of the bank's growing profit.

Banking shares have enjoyed increasing popularity over the past two weeks as more long-term institutional investors such as QFIIs and insurance companies enter the A-share market.

Although some analysts believe there will be less investment opportunities in the second half of 2006 compared to the first half, it is likely that as the ICBC lists, China's stock market will face the biggest challenge and also the biggest opportunity in its history.

This opportunity should not be seen in terms of the amount of funds that flow into the market. Instead it is an opportunity for the market to undergo fundamental change in introducing more institutional investors, cultivating a long-term investment concept, and further opening the capital market to the rest of the world.