While the rest of the world spent the first half of August grappling with falling asset prices and the onset of a credit crunch, China’s stock market quite simply soared.
Having struggled in mid-July, the Shanghai Composite Index (SCI) gathered momentum and cruised past its previous high of 4,300 before the end of the month. As Japan, Korea and Hong Kong’s markets tumbled around it, China’s market – to which foreign investors have limited access – kept rising.
The SCI has already risen 75% so far this year and, as of August 21, it was closing in on 5,000 points.
Retail investors were flooding to the market. The number of new accounts being opened each day had dipped to around 60,000 during June and July from a peak of 300,000 in May. But in early August the figure was back up to the 180,000 mark.
Liquidity was so strong that the People’s Bank of China was issuing bonds to drain cash from the system – and all this while other central banks were busy injecting cash into their economies.
While China, for the time being, appears immune to global credit problems, Chinese investors increasingly are not. In recent months, domestic banks, brokerages, fund managers and insurance companies have been permitted to build or extend their investments in overseas securities.
On August 20, individual investors were added to that list.
The State Administration of Foreign Exchange (SAFE) announced the launch of a trial scheme whereby domestic investors will be able to open accounts at Bank of China to trade Hong Kong-listed securities. The US$50,000 cap on the foreign currency Chinese citizens can buy each year will be waived.
The announcement helped send Hong Kong shares up 5.9%. SAFE said that this easing of capital account controls would reduce upward pressure on the yuan by bringing more equilibrium to China’s balance of payments.
The securities regulator may be hoping that the move removes some of the anomalies from the domestic stock market, where shares – often in the same companies – trade at a 50% premium to Hong Kong.