Strong year to spark more foreign interest

An investor smiles in a brokerage in Fuyang, Anhui province, on Monday. The Shanghai Composite Index advanced 3.6 percent to close at 3,350.52, the highest level since Aug 6, 2009. [Photo/China Daily]

Undoubtedly one of the catch-phrases that Chinese stock investors like to hear most is "opening up".

The government has already taken numerous steps to ease restrictions on foreign capital in the domestic stock market. You must have heard about QFII, or, more recently, the Shanghai-Hong Kong Stock Connect.

So far, these conduits of foreign capital have produced results that have failed to meet the expectations of stock brokers and investors. Foreign capital accounts for less than 2 percent of market liquidity. It is too small a proportion to make a difference. But things are expected to change in 2015.

Analysts say international investors will have a bigger involvement in China's A-share market as the authority is expected to broaden the investment channels and speed up the internationalization of the Chinese currency.

Although the Shanghai-Hong Kong Stock Connect program, initiated in mid-November, has been a big letdown with the daily trade quota remaining largely unused, stock analysts suggest that given more time the market will warm up, with more long-term investors like pension funds joining in after they have sorted out the compliance issues and technical obstacles.

Hong Kong Stock Exchange data showed that less than 5 percent of the 250 billion yuan ($40.3 billion) worth of southbound aggregate quota had been used before the Christmas break, in comparison to one-quarter of the 300 billion yuan northbound aggregate quota being used.

Average utilization of the daily quota has been lingering under 10 percent in both ways since the start.

"Overseas hedge funds are dominating current trade volumes, while many large-scale mutual funds are still observing the program and making evaluations. But one thing is for sure－they are very interested," said Zhu Haibin, chief China economist at JPMorgan & Co.

UBS chief China strategist Chen Li said in a recent report: "We estimate that in the coming year, new overseas funds flowing into the A-share market will exceed 550 billion yuan, and the market value of shares held by international investors will increase from the current 350 billion yuan to 900 billion yuan, equivalent to 8-9 percent of the total A-share free float market cap".

Chen cited the internationalization of the renminbi as the biggest catalyst that will lure foreign capital in. The government has set the goal of making the currency fully convertible by 2020, the subject of numerous seminars held by the People's Bank of China, the central bank.

This means that in six to eight years' time, A shares will likely be included in international indexes in accordance with internationally accepted rules and will not be given significant discounts.