- The Washington Times - Wednesday, January 8, 2003

SINGAPORE, Jan. 8 (UPI) — Foreign capital inflows to China's stock markets are expected to be slow and gradual. The Shanghai Stock Exchange's vice executive president, James Liu, said Wednesday he expects the first Qualified Foreign Institutional Investor licenses to be issued in March or April.

Investments will probably start within the next six months.

Last month, the government eased the restrictions on domestic equities, with a limited opening to the A-share and bond markets to foreign investors. The scheme will allow foreign investors to trade shares denominated in renminbi for the first time.

Previously, foreigners could only freely trade in the country's hard currency B shares, a market of only $10 billion.

Under the QFII plan, foreign investors must choose a qualified bank to take custody of their funds. Liu said five banks have already been approved as custodians, including two foreign ones: HSBC and Citibank.

"I would expect quite a few investors from Europe, the United States and Hong Kong (to be interested in the scheme)," Liu told reporters while on a roadshow for the exchange.

"But I would not anticipate them investing too much, even after they get their licenses," Liu added. Indeed, Liu said he hoped that investors will take a cautious approach in selecting stocks, and choose Chinese companies based on their fundamentals.

"As an exchange, we don't want too many investors coming at the same time anyway, as we still have issues to resolve," he added.

Liu said foreign investors should look at the Chinese stock markets (Shanghai and Shenzhen) as only one market. The Shanghai exchange has about 700 listed companies, vs. 500 in Shenzhen.

The two exchanges have not performed well in the last year, with their combined turnover falling 27 percent last year to about $338 billion. The benchmark Shanghai composite index lost 17.5 percent in 2002 and many investors are wary of the market's near-term prospects.

Indeed, despite 67 new listings, total market capitalization was unchanged last year, Liu acknowledged.

Liu also confirmed that although there were about 34 million registered investors in the Shanghai Stock Exchange, only half of these accounts were actually active. "But even 15 million is still a very good result," he said.

Analysts believe capital inflows in Chinese stocks will remain muted for the time being, owing to the high valuations of local stocks and the poor level of corporate governance. Liu defended the corporate governance level of Chinese firms, saying that corporate governance was now "a universal problem."

He said: "Obviously, there is room for improvement and we recognize there are some problems, but in term of corporate governance, the situation has also changed dramatically in the last 16 months."

But Liu acknowledged that the market would remain soft for the time being, saying that he only anticipated about "a dozen IPOs" each quarter this year. Last year, the exchange saw the listing of only 67 companies, well below the 100-plus average seen in previous years. "The market has been underperforming and listings have been slowing down," he noted. "But if you look at the potential for listing, (it is) tremendous," he added.

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