Interview with Dutch Fund Manager: US Has Stricter Shareholding Reduction Rules Than China
Zhou Ailin
/SOURCE : Yicai
Interview with Dutch Fund Manager: US Has Stricter Shareholding Reduction Rules Than China

(Yicai Global) June 12 -- Foreign funds have ramped up allocations to the Chinese A-share market in recent years. It has less to do with the position of any specific Chinese stock indexes than with the fact that the USD7 trillion A-share market covering over 70 percent of all stocks listed in China is the second largest stock capital in the world; the country has stepped up deregulation of its capital market; and that Morgan Stanley Capital Index's (MSCI) recent proposal significantly increased the possibility of A-share stocks being admitted to the MSCI emerging markets index. If they overlook the A-share market, foreign funds will not be able to develop a complete investment strategy or benefit from China's economic growth in future.

Yicai Global recently held an interview with Victoria Mio, chief investment officer and Chinese stock portfolio manager at Robeco China, the Chinese arm of Robeco Group, the largest asset management firm in the Netherlands. In the interview, she elaborated on current issues related to China's financial market, including the effectiveness of the recent 'shareholding lessening' rules compared to relevant regulations in the US, and the A share's possible inclusion in the MSCI index this month. 

Founded in 1929, Robeco is one of the foreign asset management companies that stepped into the Chinese stock market in recent years. It is a major asset management subsidiary owned by Robeco Group. The group is one of the first several foreign asset management firms that obtained the 'wholly-foreign-owned enterprise' license in China last year.

The US Has Stricter Rules Than China

The market reacted strongly to the 'new rules on shareholding lessening' recently introduced by the Chinese securities regulator. The rules put an end to the situation where the secondary market functioned as a 'cash machine' for the primary market as in the latter derives profits from the former's losses. Naturally, the new rules also gave headache to some stakeholders.

China Securities Regulatory Commission (CSRC) capped the total number of shares sold by a major shareholder of a listed company through block trade in any given 90 days at 2 percent of the total number of shares in the company. Buyers of the shares are prohibited from selling them in the six months after their purchase.

However, 22 block trade deals were transacted at a premium on June 1. The premium on Fujian Anjoy Foods was as high as 14.41 percent, and that on Guilin Fuda, Hongyang Energy Resource Invest, Huatie Construction Safety Science and Technology and Wanfeng Auto Wheel were 9.74 percent, 8.95 percent, 8.74 percent and 8.27 percent, respectively.

Shares were traded at a premium despite the tightening regulation, but the "deals are just isolated cases and don't reflect the general trend," Mio told Yicai Global, "In fact, our statistics suggest that the proportion of block trades priced at a premium didn't increase substantially after the introduction of the new rules."

On the other hand, she pointed out, the number of block trades had fallen steeply from around 70 a day to 36 in the last week, indicating that the rules have indeed put a curb on block trading.

"We believe that the new rules will put the brakes on extensive shareholding reductions by major shareholders and shareholders who bought shares through private placements. They'll ease the short-term downside pressure on the stock market. In the long run, the rules make shareholding reduction more difficult, and make it harder to predict the profitability of such deals, so they can put a curb on speculative investment, and encourage major shareholders to refocus on long-term value investment."

Then, what are the differences between China and the US in terms of shareholding reduction regulation?

The US Securities and Exchange Commission (SEC) regulates share re-sales by major shareholders based on 'Rule 144' and the shareholders are subject to stringent information disclosure requirements. Apart from the one-year lockup period, they must file any proposed share sales with SEC in advance, and disclose the latest information of their companies.

The total number of shares sold in any three months is capped at one percent of the total number of similar shares issued, or the average weekly trading volume in the previous four weeks, whichever is greater. Furthermore, senior managers and directors are required to apply with SEC in writing in their sell more than USD50,000 worth of shares of 5,000 shares in any three-month period.

In the US, the number of shares involved in a block trade or an over-the-counter deal may not exceed 1 percent of the total number of shares, compared with the 2 percent upper limit in China for block trades in 90 days.

"Overall, the US implements stricter regulation over shareholding reductions by major shareholders especially when it comes to information disclosure and the maximum number of shares that can be sold by internal shareholders," Mio said.

International Investors Ramped up Allocations to the A-Share Market

International investors have continuously increased their investment in the Chinese stock market. MSCI will announce its decision as to whether A shares will be included in its emerging market index. Its favorable decision will change investors' expectations of the liquidity level in the A-share market. 

"Compared with what happened in the last several years, it's extremely likely that MSCI will accept A shares this year. It's now the second largest stock market in the world, and is worth USD7 trillion, accounting for about 10 percent of the global total," Mio predicted.

The MSCI emerging markets index is actually already exposed to the Chinese economy in many ways, she noted. All the stocks of Chinese companies included in the index are listed in Hong Kong or American exchanges, and none of them are floated on the A-share market. A-share stocks are not included in any major global stock indexes, meaning that international investors cannot fully benefit from the Chinese stock market.

The global stock index provider put forward a new plan for the inclusion of A shares in its emerging markets index based on the 'Shanghai-Hong Kong Stock Connect' program earlier this year. It proposed to cut the number of A share stocks to be included in the index to 169, and estimated that A share's weighting in the MSCI China index and emerging markets index would be reduced from 3.7 percent and 1 percent to 1.7 percent and 0.5 percent, respectively. The proposal also addresses concerns among foreign institutional investors over restrictions on A share redemption.

The monthly amount of capital redeemed by a Qualified Foreign Institutional Investor (QFII) is currently capped at 20 percent of its net asset in the previous year. The restriction poses a possible liquidity barrier to foreign institutions if their clients request to redeem their investment. With the new plan, however, the liquidation barrier can be removed, and share redemption will not affect the QFII quota of foreign institutions.

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Keywords: Robeco , Investment , Stock Market , MSCI China , INDEX , Inclusion , A-Share Market , Investor , Capital