China meddling in stock market seen discouraging return of foreign funds

[HONG KONG] Foreign fund managers who cut their China exposure amid the recent share rout are wary about putting the money back if Beijing continues to intervene heavily in its equity markets.

Many see Beijing's moves to counter the market slump as a significant setback to its economic reform push, adding to their difficulties predicting China share performance.

Even though state intervention arguably kept shares from falling further, fund managers say some measures to curb short-selling and the way Beijing handled the crisis have hurt confidence in its regulations and markets.

Given the size of the world's second-largest economy as well as its capital markets, they are not quitting China. But approaches have changed.

"We've put China into a more neutral position and we were able to ship some money from North Asia to Southeast Asia including India," said Ronald Chan, chief investment officer of Asian (ex-Japan) equities at Manulife.

Chan said it would be "premature" to move back into the mainland's A shares now, and whether this happens in the medium term depends on whether the Chinese government reduces its intervention.

Bhaskar Laxminarayan, chief investment officer at Bank Pictet & Cie (Asia) Limited, said that from an international perspective, "it doesn't matter which market it is, intervention is always considered as negative." "We are now getting interventions every day and that's a mistake," he said.

Amid a market rout since mid-June that made the Shanghai bourse slump over 30 per cent, Beijing has cracked down on "malicious" short selling, banned shareholders with large stakes from selling and investigated share dumping.

So far, there's been little sign of a sustainable market rebound with investors still jittery about sky-high valuations as well as fresh policy risks.

Such risk has added to the noise when considering China investments, said Laxminarayan, who believes A shares have further room to correct. He said China will remain underweight in his portfolio.

In past years, China has accelerated the pace of market liberalisation and relaxed controls in areas including yuan internationalisation. However, the command and orders Beijing have imposed following the recent market meltdown have made investors worry that China is shifting its focus away from its reform agenda and made them rethink their investment strategies.

Just before China's stock market peak in June, US index provider MSCI Inc told Beijing to further liberalise capital markets before it would include Chinese domestic shares in a global benchmark.

A fund manager at an Asian wealth management company in Hong Kong said China's interventions "have deeply hurt foreign investors' confidence in the market".

He said the crackdown on short selling will force foreign funds that invested via formal channels like the Qualified Foreign Institutional Investor (QFII) scheme to use unregulated channels to move money in and out of China.

The manager said that after he cut A-share exposure held through QFII, the proceeds have stood idle in the custodian bank due to his worries he could be accused of "malicious short-selling" if he seeks to move the money out. "The first thing we'd like to do after the market normalizes is to get our money out and we'll be very careful putting in any new money given lessons we've learnt this time around," he said.

Some managers, including Chan of Manulife, are considering creating more balanced products in China as they see increasing demand from clients wanting more exposure to bonds than equities.

Foreign investment in China's domestic securities markets remains small due to limited channels. It accounts for less than 2 per cent of the total $9.5 trillion capitalisation of the country's stock and bond markets, according to Reuters calculations.

REUTERS