Legendary Investor Mark Mobius Wants a More Open Chinese Capital Market

（原标题：Legendary Investor Mark Mobius Wants a More Open Chinese Capital Market）

“The introduction of foreign institutional investors tends to reduce volatility (in emerging markets) since they behave differently from local retail investors.”

China’s recent moves to further ease foreign access to its capital markets are very much welcomed, but more could be done in terms of capital control, international investor Mark Mobius told  Weekly on Stocks this week.

The co-founder of Mobius Capital Partners says his firm’s exposure to Chinese mainland shares is about 20% of the total portfolio, all of which were acquired through a Hong Kong stock link to the mainland.

There are two categories of channels for foreign investors to access Chinese mainland stock market. One is a scheme called the Stock Connect. It allows international investors to purchase eligible mainland shares through local brokers in Hong Kong and London.

The other channel is the Qualified Foreign Institutional Investors (QFII). It is a broader and more direct way to access the Chinese capital market, but only some of the largest financial institutions have been licensed.

China announced in September that it will relax qualification rules and simplify procedure for global institutions to apply for QFII licenses. The new rules, which will take effect on November 1st, also broaden the investment scope to include more asset classes.

Mobius says a big advantage of investing directly in Chinese A-shares (through QFII) is the access to more stocks. “There are a limited number of A-shares listed in Hong Kong, so direct access to the A-share market will open up more opportunities for foreign investors.”

However, China’s capital control remains a major bottleneck for foreign investors seeking to invest in China. Currency conversion has not been completely free and sometimes it needs tricky maneuvers.

Mobius believes the key to further open the Chinese capital market is “to allow the free flow of currency in and out of the country, so when funds need to redeem and convert their RMB back to USD or other currencies, they can do so efficiently and quickly.”

The expert in emerging markets also commented on the high price-to-earnings ratios of some of the most popular consumption stocks in China. He says “the valuations do not depend on P/E ratios, but on return on investment.” While many companies are doing well, “only those names that have a technology edge” will eventually win out.

The following is a recap of Weekly on Stocks’s interview with Dr. Mark Mobius, co-founder of Mobius Capital Partners LLP.

Part One:

Q: Are you happy that China has refined the QFII regime and lowered the threshold for foreign institutions to access its capital markets?

A: Yes, of course such opening up is very much welcomed. 

Q: What remains to be done, in your opinion, for Chinese policymakers to continue to push for a more open capital market?

A: It’s mainly about capital controls. Within the Chinese government there has always been a tension between those who wanted more opening of the market and the PBOC who wants to control currency flows. 

Q:  Why does the capital control concern you so much and what is the key?

A: The key, of course, is to allow the free flow of currency in and out of the country, so when overseas funds need to redeem and convert their RMB back to USD or other currencies, they can do so efficiently and quickly. 

Q: But some people in China worry that opening up too quickly would bring great volatility to the markets in the short run. Do you agree with them?

A: Past experience in other countries indicate that the introduction of foreign institutional investors have tended to reduce volatility, since foreign investors behave differently from local retail investors -- when one side is selling, the other is buying. 

Q: Besides China’s measures, what else would an international investor consider before investing in China? How about the U.S.-China tensions?

A: Of course the U.S. measures, for example, to stop its public pension funds from investing in the Chinese market will have an impact. Currently it is limited since it only impacts the pension funds directly run by the government and does not touch the many other pension funds. However, if a law is passed to prevent anyone in the U.S. from investing in the Chinese market, then the impact could involve billions of dollars of investments.

Perhaps one of the reasons why the Chinese government is now relaxing the rules is to encourage more U.S. investments, so U.S. investors become more committed to the Chinese market, which makes it more difficult for the U.S. government to impose controls. 

Q: What are the differences between investing in Chinese A-shares through QFII and through the Hong Kong Stock Connect regime?

A: The big difference is the ability to have access to more stocks. There are a limited number of A-shares listed in Hong Kong, so direct access to the A-share market will open up more opportunities for foreign investors.

Q: What’s your exposure to the Chinese A-shares?

A: We currently only have exposure to the Chinese shares through the Hong Kong market. Exposure is about 20% of our portfolio.

Part Two:

Q: Many global institutions such as the World Bank and the IMF forecast that the emerging markets would lead the post-pandemic recovery, while the advanced economies would not fully recover from the Covid-19 shock until 2022. What’s your take?

A: Agree. Since developing countries are faster growing, their recovery will be faster.

Q: China is leading the real economic recovery while the U.S. is leading the stock market rebound after the outbreak of the coronavirus. Which of the two countries’ equity markets will fare better in the near future?

A: The A-share market has been generally keeping up with the U.S. market, but it’s impossible to say which will do better going forward. 

Q: Do you think that the A-shares are in the beginning of a bull market?

A: It would better be described as a sideways moving market. Eventually it should move higher.

Q: Chinese consumption stocks have become a hot spot in recent years. Would the trend continue?

A: The consumption market will be important but only those names that have a technology edge.

Q: The leading Chinese consumption stocks have high price-to-earnings ratios, with some of them reaching 100. Do you think they are overvalued?

A. The valuations do not depend on P/E ratios but on return on investment. So many companies are doing quite well.

Q: A Chinese version of “Nifty Fifty” stocks is under heated discussion. The U.S. “Nifty Fifty” once had a bubble that burst quickly. Would the Chinese “Nifty Fifty” face the same situation or will they show some new features?

A: It will show new feature going forward with a new wave of AI hitting the market.