Stocks may draw more foreign investors

China's stocks, among the only ones to miss a 20-month global rally, may reward investors prepared to venture into the nation¡¯s partially opened equity market.

¡°We see value emerging in a range of stocks,¡± said Chris Ruffle, manager of the China A-Share Fund of Martin Currie Investment Management Ltd. in Edinburgh, Scotland. ¡°There¡¯s an advantage in going in when the market is down. Prices are cheaper.¡¯¡¯

Ruffle¡¯s US$80 million fund has gained 18 percent since its inception a year ago, beating a 3.4 percent drop in prices of Shanghai-traded shares. He holds stocks such as Beijing Yanjing Brewery Co., China¡¯s third-largest beermaker, and plans to invest US$30 million more in the market.

Funds such as Martin Currie and banks including UBS AG, Citigroup Inc. and Morgan Stanley have received approval from the government to invest US$3 billion in shares and convertible bonds since China opened its US$460 billion of domestic equities to selected overseas investors in May last year. For the first time, outsiders can buy yuan-denominated A shares, which account for 99 percent of the stock traded on China¡¯s two exchanges in Shanghai and Shenzhen.

The Qualified Foreign Institutional Investor (QFII) program now has 27 approved investors, each restricted to an investment limit agreed with the government. Zurich-based UBS, Europe¡¯s largest bank, was the first to be approved and holds the biggest quota, at US$800 million. Citigroup is second with US$400 million.

So far, the inflow hasn¡¯t revived the market. China¡¯s indexes are the only ones among 60 national benchmarks that haven¡¯t gained since March 2003, when Morgan Stanley Capital International Inc.¡¯s World Index began a 57 percent advance. The Shanghai and Shenzhen composite indexes are down 12 percent and 22 percent respectively in dollar terms.

Financial scandals at companies such as Guangxia (Yinchuan) Industry Co., fined last year for China¡¯s biggest securities fraud, helped drive the declines.

Investors have also been spooked by government efforts to slow the economy, which grew 9.3 percent last year. China curbed bank lending to selected industries in May and last month raised interest rates for the first time in nine years.

Undeterred, Martin Currie would apply for a QFII license ¡°very soon,¡¯¡¯ Ruffle said. Up to now, the company has bought stocks under agreements with UBS and other banks to use part of their quota. Licensees must have at least US$10 billion in assets and US$50 million to spend. Martin Currie manages US$13.9 billion globally, according to its Web site.

Credit Suisse First Boston, the securities division of Credit Suisse Group, had applied to increase its US$50 million investment quota by US$700 million, said Josephine Lee, a spokeswoman in Hong Kong.

UBS also planned to ask for a higher limit, said Nicole Yuen, the bank¡¯s head of China equities in Hong Kong. ¡°We have more client demand than our quota,¡¯¡¯ she said.

The lure is a country of 1.3 billion people in which urban disposable incomes have surged 27-fold in the past 25 years, according to the National Bureau of Statistics. Increasing wealth is driving a consumer boom and boosting corporate profits. Even with more interest-rate increases to come, the economy is likely to grow 8.4 percent next year, according to the median forecast of eight economists.

Liu Yang, who oversees US$1.8 billion as managing director of Atlantis Investment Management Co. in Hong Kong, said she was also planning to invest US$30 million in yuan-denominated shares.

¡°We may pick up a few retailers who are good local brand names¡¯¡¯ as well as port and power operators, said Liu. Stocks she likes include Yibin Wuliangye Co., a unit of Wuliangye Group, China¡¯s largest spirits maker, and China Yangtze Power Co., owner of the world¡¯s biggest hydropower project.

China¡¯s domestic market comprises 868 A and B stocks traded in Shanghai and 574 in Shenzhen. The 109 dollar-denominated B shares were created in a previous move by China to allow overseas investors restricted participation in its capital markets.

The A-share menu offers a broader choice than the 94 H shares and red chips floated in Hong Kong by mainland companies such as China Mobile (Hong Kong) Ltd., the world¡¯s largest mobile phone operator.

At the same time, investing in A shares means taking the risk of the government¡¯s plans to divest as much as US$300 billion of stakes in State companies.

At least twice in three years, China has announced plans to start converting its holdings into traded shares, only to retreat as prices slid on investors¡¯ concerns the market would be swamped with new stock.

¡°The overhang of State shares is a critical problem,¡¯¡¯ Martin Currie¡¯s Ruffle acknowledged.

Source: Shenzhen Daily/Agencies