China is on the cusp of expanding its stake in Australian stocks. First came the wave of Chinese investors buying into Australian real estate. They’re partly responsible for pushing up national house prices by 7% in the past year. Now a new influx of Chinese capital could be about to hit the ASX.
The reason for this is simple. The Chinese government is readying itself to relax restrictions on foreign stock purchases. They’re dubbing it the ‘Qualified Domestic Individual Investor’ program. When it launches on 1 July, it will open up Aussie markets to vast sums of untapped capital.
The move is just the latest step in a bid to further liberalise Chinese capital markets. By easing restrictions on trading, retail investors will find it easier to buy Australian stocks.
There’s a simple reason why they can’t do so now. Retail investors are forced to go through mutual funds approved by Chinese regulators. Those restrictions have prevented Chinese investors from flooding global equity markets up to now. But that could be about change.
So what will the new program’s arrival signal? For one, it will diversify investment channels for Chinese investors. In other words, they’ll have more options about where to invest their money. Most of their activity still currently takes place on the Chinese stock market, like the Shanghai Stock Exchange, the program will change all that.
But it’s not just Chinese investors that will benefit. Any increased activity in foreign markets will benefit the end user. Take Australian fund managers for instance. A mutual or pension fund will be able to market its products directly to Chinese investors unlike before.
But will Chinese investors be as keen to invest in Australian stocks? If the frantic activity on Chinese stock markets is anything to go by, then the answer is yes.
Chinese stock markets have risen by 140% over the past year. In fact, the value of traded Chinese stocks is six times higher than the NYSE. If that’s any indication, then Chinese investors could create a seismic shift on the ASX.
Currently, only high net worth individuals invest heavily in foreign markets. That’s mostly down to strict regulations. Over 37% of individuals worth more than $1 million have foreign stocks in their portfolio. Half of these say that they’ll be increasing their offshore investments in the future. And that’s to say nothing of less wealthier investors. If the program is successful, they could quickly add to the number of foreign equity investors.
That’s why this deregulation is an exciting development for Australian companies and stock markets.
How much capital will flow onto global markets?
The Chinese government has placed a $62 billion quota for the program when it launches. They believe the new regulations will push $4–6 billion onto global markets at first. That sounds relatively small. But the program will escalate quickly if it proves to be an instant success.
But China still prefers to roll the program out incrementally. That’s why they’re limiting it to wealthier retail investor as a starting point. That means that only investors with $200,000 in investable assets will take part.
All told, the program could create a prolonged boost to the Aussie stock market. And it couldn’t have come at a better time. In recent months equities have lost some of their steam on the back of lower than expected earnings and profits. That’s where Chinese investors could prove useful in redressing this downturn.
Contributor, Markets and Money
PS: Beyond stocks, growth rates of 5–7% in China will present huge opportunities for Australia’s economy. Markets and Money’s editor, Phillip J. Anderson, is bullish on China. Phil doesn’t agree with economist who criticise China’s falling growth rates. In fact, he thinks they’re wrong on China altogether. Phil is convinced China’s boom is only beginning…and that it’s set to last another decade.
As China’s stock markets liberalise, investors will find it easier to tap into Chinese capital. But you’ll still need to invest smart in order to grow your portfolio and wealth. That’s why Phil’s written a free report designed to show you how to invest confidently and successfully in China. To find out how to download his report, ‘The Cassandra Syndrome: After This Report, You Won’t Worry About China Again for Another Decade’, click here.