International speculative funds, or hot money, may swoop into the A-share market in the second half of this year and boost the sagging stock index, according to a recent report from Bank of China (BOC).
The report, compiled by BOC’s global financial market department, categorized hot money into two kinds. One aims to profit from interest rate gaps or currency appreciation, while the other bets on higher profit from the capital market.
The report estimated that the latter type of funds ballooned in China as early as 2005. Some funds retreated last year after the US sub-prime mortgage crisis, but returned in April this year when the credit crunch eased. Given their huge existing amount and continuous influx, the funds have a large impact on domestic financial system, according to the report.
Meanwhile, following closely the performance of FTSE/Xinhua China index futures traded in Singapore, researchers found it a good leading indicator of domestic A-share market. They then perceived that the premium rate of the December contract versus the spot FTSE/Xinhua index stabilized in the middle of March, when the Shanghai Composite Index ran between 3,500 points and 3,000 points. This phenomenon suggests a similar value of domestic A shares is acceptable for foreign investors.
Therefore, the report presumed that the hot money will probably dive into the A-share market at current prices, propelling a stock rally in the second half of the year.
The mainland stock markets fell some 50 percent since the beginning of this year amid economic uncertainties and weak international markets. Share prices of many firms were halved without major profit changes, also posing some potential chances for long-term investors.