The Chinese market correction is not due to the unwinding of carry trades by international hedge funds. Chinese currency is not free floated, apart from that, only foreign investors with QFII quotas are allowed to trade Chinese A-share subject to stringent lock up conditions. So the sudden change in direction must have been solely caused by local Chinese investors and local Chinese funds.
ii) The Chinese People's Political Consultative Conference (CPPCC), a meeting participated by appointed representatives from all walks of life in which major policy decisions are consulted.
Before the meetings were started this Monday there have been rumours related to new government policy to cool down the stock market. Though nobody can show the exact reasons for the sudden and abrupt market correction, the fear created by the rumours is the most likely cause. Now three days has passed and no such agenda is tabled to discuss the heat of the market, investors' anxiety is relieved and the market starts to pick up again.
There is one very important message I picked up from the news this week, it’s about China’s plan to list those Hong Kong listed ‘Red Chips’ back to Shanghai market as A-share.
Before I go on, we must understand clearly what those jargons are:
Hong Kong registered company listed in the Hong Kong Stock Exchange with at least 30 per cent of its shares in aggregate held directly by Mainland
According to a speech last week by the Chairman of Shanghai Stock Exchange Mr. Geng Liang, the Red Chips will return home as early as June this year. What’s the significance of this news?
By the end of November, there are 85 red chip companies listed in
Under the current mainland
Such return is seen as another step taken by the mainland to strengthen the Chinese stock market. As most of the Red Chips are large caps with long operating history under Hong Kong's listing regulation
So who are those Red Chips in the queue to return home? Out of the 85 companies it is widely speculated that the followings will be among the pioneers:
China (CHL, 0941.HK) Mobile Telecom (CHA, 0728.HK) China Netcom (CN, 0906.HK) China
- CNOOC (CEO, 0833.HK)
For those telecom stocks, the priority is obvious. They have immediate funding needs to prepare for the 3G capex when such license is granted, it makes sense to raise new fund in local currency which will be spent locally.
From investor perspective this will also be good news, we expect to see a healthier mainland stock market with less volatility while still giving us a very promising expected return. This is a very important first step to manage the heat of the market, another step expected to happen this year is the creation of a channel to allow arbitrage between H-share and A-share (eg, via CDR Chinese Depository Receipt) to tighten the spread between the markets. I will write more about this second step when it is closer to reality.