Reform efforts in China seem to be gaining momentum. The big question is whether these reforms will buoy investor confidence, and jumpstart China’s local A-share market. In November 2013, the Chinese Communist Party convened its Third Plenary Session, resulting in a general blueprint for the country going forward officially called “A Decision on Major Issues Concerning Comprehensive and Far-Reaching Reforms.” There were a variety of areas targeted, including fiscal reform, anti-corruption efforts, and integrated rural-urban development. Since then, the Chinese government has released more detailed reforms plans, and of particular interest to us as investors are those related to the capital markets. I’ve invited my colleague Eddie Chow, senior executive vice president and managing director, Templeton Emerging Markets Group, to share his perspective on these reform efforts and his outlook for China’s equity market.
The Chinese government, through both the communications during the National Peoples’ Congress in March and more recently in the release of the “Guiding Principles for the Healthy Development of Capital Markets” by the State Council, has put up a detailed agenda for capital market reform. The reform plan is comprehensive and we believe most of the specific reforms initiated are significant for investors. Some of them could have an immediate impact, while some are more structural in nature, rendering potential market impact over a longer-term basis. For example, on the opening up of the capital markets, the Shanghai–Hong Kong Stock Connect Scheme, which increases both inward and outward investment quotas and relaxes foreign shareholder limits in listed companies, could very soon help inject more liquidity into the local China A-share market. Over the medium to longer term, we believe the greater participation of foreign investors may change behaviors and dynamics of the market and even governance at the company level. To improve the structure of the capital markets, in addition to developing the bond market (which itself is essential in helping to determine prices for costs of capital in China), the approval-based stock issuance system in the A-share market will be replaced with a registration-based one. There are also new rules governing initial public offerings (IPOs) published by the Securities Association of China. Additionally, we believe regulators will work to crack down on potential insider trading, enhance information disclosure, improve delisting regime and support pension fund investments. We also believe all these new reform initiatives should help gradually regain interest in China’s A-share market.The goal of these efforts is to make China’s capital markets much more diverse, structured and transparent. This is very important, in our view, as there is a large amount of private savings in China that could be invested. So far, much of the work is being done by the state-owned dominated banking system and of course, the banking system has a lot of limitations. Continue Reading »