Equity Market Trends in Mainland China and Hong Kong

by Wenli Yuan, December 26, 2007

Abstract

Beijing, China December 26, 2007

Mainland China's equity market will continue to grow and become more open to global investors, although the Chinese government's monetary policy shift may slow down growth in 2008. In contrast, Hong Kong's equity market is already quite mature and open.

The equity market in mainland China is an emerging one with limited foreign access. The number of IPOs in 2006 increased significantly, and funds raised in 2006 were extremely high. The prosperity of the primary market was not only due to the large number of IPOs, but also due to some mega-IPOs in 2006. In a new report, , Celent separately examines both mainland China and Hong Kong's markets and provides suggestions for securities firms interested in giving foreign investors access to Chinese equities.

The number of IPOs and funds raised will continue rapid growth in 2007 and 2008. The IPO price-earnings/ratio for the first half of 2007 was over 30, encouraging more companies to be listed in the local capital market. IPOs of large-scale state-owned companies will continue the mega-IPO trend in China.

For the secondary market, stock market turnover increased remarkably to over US$1.1 trillion for 2006. This trend will continue, with market turnover reaching US$6 trillion for 2007.

Unlike the mainland, Hong Kong's equity market is quite mature and open already. There are more institutional investors: overseas institutions' transaction values account for 39% of the market, local institutions make up 26%, and overseas investors account for 40%. Hong Kong was the second largest IPO destination after London in 2006. For secondary market trading, it was ranked sixth worldwide, and second in Asia at the end of 2006. Mainland China's stocks play an increasingly important role in the Hong Kong Exchange market. H-share and red-chip stocks represent 45% of total market capitalization and 64% of market turnover.

Both mainland China and Hong Kong's equity markets will continue to grow in the coming years. More financial institutions and large state-owned enterprises will be listed in Shanghai Stock Exchange, Hong Kong Exchange, or both. Overseas IPOs and Hong Kong IPOs continue to be the major exit option for venture capital and private equity, but the secondary market's growth rate may slow down because of the Chinese government's shift in monetary policy from prudent to tightening at the end of 2007.

"Overseas investors have limited access to directly invest in China's equity market. Only 52 qualified foreign institutional investors were able to invest in China's A-share market as of January 31, 2007, with the total quota for these QFIIs reaching US$10 billion," says Wenli Yuan, Celent senior analyst and author of the report. "China's equity market will become more open to foreign investors in the coming years, with the total quota for QFIIs increasing to US$30 billion. More joint venture brokerage houses will be approved, and JVs will be allowed to gradually expand their business scope. QFIIs will receive quotas for futures investments as well," she adds.

A table of contents is available online. The report is 29 pages and contains 23 figures and 7 tables.

Members of Celent's Retail Securities & Investments and Institutional Securities & Investments research services can download the report electronically by clicking on the icon to the left.  Non-members should contact info@celent.com for more information.  

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

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Table of Contents

Beijing, China December 26, 2007

Executive Summary 03
Introduction 05
Mainland China 06
  Primary Market 06
  Convertible Bonds 09
  Secondary Market 10
  Foreign Capital Investment Channels 11
Hong Kong 20
  Primary Market 20
  Convertible Bonds 23
  Secondary Market 24
Conclusions 27

 

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