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Equity Market Trends in Mainland China and Hong Kong: New Celent Report

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, Equity Market Trends in Mainland China and Hong Kong, 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.