2003-07-01 09:39:58
What will QFII investors buy?
  Author: CHEN YAO,China Business Weekly staff

China's 4 million stock investors have been champing at the bit in recent days, eagerly awaiting the landmark share purchase by foreigners under the qualified foreign institutional investor (QFII) scheme.

Meanwhile, speculation has been rife about which stocks the QFII investors will favour.

Swiss financial giant UBS AG is expected to become the first QFII investor to trade in China's yuan-denominated, US$500-billion A-share market.

UBS AG was expected last week to make its first purchase, but decided to delay its moves when the market began fluctuating around the psychologically important 1,500 point mark.

"They (UBS AG) haven't contacted us yet to place an order," an official with Shenyin & Wanguo Securities Co, UBS AG's local broker, told China Business Weekly.

"We are not sure why they delayed their purchases ... We only act on instructions with respect to particular prices and quantities," said the official, who requested to remain anonymous.

UBS AG's executives were not immediately available for comment.

"The entry of QFII investors will shock China's stock markets," predicted Liu Dejing, a renowned securities analyst with Beijing Securities Co's research centre.

"But the immediate impact will be kept to a minimum, as the market has contained all related information about such entries."

Speculation has swirled since December - when the QFII scheme was unveiled - that foreign investors would prefer blue-chip stocks.

On that anticipation, blue chips have become expensive. Share prices in the auto and steel sectors, for example, have soared more than 50 per cent since the beginning of the year.

"We see bright futures for companies ... with monopoly status," Joe Zhang, an investment strategist with UBS AG, was quoted by China Securities Journal as saying.

"These ... will cover airports, cable television, power, wine making and sectors that enjoy China's comparative advantages in labour costs."

Blue chips - stocks with solid fundamentals and comparatively low price-to-earnings ratios - usually have large market capitalization and comparatively high liquidity, Zhang said.

Such companies are just what QFII investors are looking for, Zhang said.

However, experts suggest QFII investors could eventually surprise everyone - by buying the most unlikely shares.

"QFII investors might show interest in stocks belonging to the Internet sector," Liu said.

"Dot-com stocks in US markets have picked up again over the last few months."

Share prices of Sina.com and Sohu.com, two of China's most popular portals listed on the US-based NASDAQ, have soared more than 10 times since the dot-com bubble burst two years ago.

"If everybody rushes to buy blue-chip stocks, the QFII investors will likely switch to other stocks," suggested Zuo Xiaolei, a senior securities analyst with Galaxy Securities Research Institute under Huaxia Securities Co.

"So, it is useless for individual investors to try to guess which shares will be QFII investors' favourites."

The securities watchdog, on the other hand, will not have the power to compel QFII investors to disclose their transactions immediately after the deals close, Zuo said.

As a result, individual investors hoping to make profits by following QFII investors' plays are unlikely to receive attractive returns, Zuo said.

"There is little possibility the QFII investors will buy into the country's closed- and open-end funds," Liu said, "although their QFII status allows them to do so.

"This is because these investors have established their own analyst teams to research China's domestically listed companies ... And they have been doing this for a while."

Said Zhang: "Our (UBS AG) market research has been focused on nine Chinese firms. And we expect to expand the scope of our research to 50 firms by the end of this year."

Experts suggest the QFII plan this year will attract just a few hundred million US dollars in capital. Some speculate about US$10 billion will flow into the markets over the next two years - still puny compared with the US$500-billion bourse.

Implementation of the QFII scheme is necessary before China can liberalize its capital accounts, experts suggest.

The government has set a comparatively high threshold for foreigners hoping to be receive QFII status. Therefore, the scheme will have a limited effect on the renminbi's foreign exchange rate.

Four foreign institutions - US-based Citigroup Global Transaction Services, Swiss financial giant UBS AG, US-based Morgan Stanley Co International Ltd and Japan's Nomura Securities - have received QFII status.

UBS AG and Nomura Securities previously had secured quotas of US$300 million and US$50 million, respectively, from forex regulators.

Dutch giant ING Group, HSBC Holdings Plc, Germany's Deutsche Bank AG and Goldman Sachs are waiting for their QFII designations, industry insiders said.

UBS AG signed an agency contract several days ago with Shenyin & Wanguo Securities Co to finalize its preparatory process to enter the domestic market.

Shenyin & Wanguo Securities Co, one of China's largest brokers, with a nationwide network of 109 outlets, will buy and sell shares on behalf of UBS AG.

All QFII investors are prohibited from trading directly in China's securities market.

(Business Weekly 07/01/2003 page4)

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