Why China's Stock Market May Attract More Long-Term Investors

TAIPEI, Taiwan (TheStreet) --China's notoriously volatile stock market is now becoming a place for the buy-and-hold investor.

Though Chinese stocks have skyrocketed over the past year, many analysts believe the rally is far from over. So if you can stomach the volatility, this market could offer some opportunities for the long-term foreign investor.

Stock values took off a year ago this month after new rules made it easier for Chinese nationals to buy shares. That encouragement came at the same time wealthy Chinese buyers were increasingly looking for places to invest, analysts say, primarily because Chinese officials were tightening the rules on investing in the property market, the traditional magnet for Chinese money. 

"There's so much money in market now and nowhere to flow to but stocks," said Chester Liaw, economist at Forecast Pte in Singapore.

Shares in Shanghai rose 119% from May 2014 to April 30 this year, tracked by a 103% gain on the Shenzhen bourse. But the Shanghai Composite Index fell 4% on May 5 and posted a 7.7% drop Jan. 19, both tumbles following news that regulators would restrict bank loans for securities. The government said last month it would encourage short-selling instead.

Similar fluctuations could dog the market until regulators roll out a full suite of rules to bring it in line with international standards, making it more attractive to their own citizens as well as the 261 firms with qualified foreign institutional investor quotas. Institutions had previously worried about China's poor transparency, bad deals for minority shareholders, and spotty regulation.

China's "bull run" began a year ago when the central government released a capital market reform blueprint to increase access and raise transparency, the official Xinhua News Agency reported this month. It set out to streamline approvals for IPOs and remove certain curbs on financial derivatives. The Shanghai-Hong Kong Stock Connect program, which allowed restricted A shares to trade freely offshore, gave the market "a fresh boost," Xinhua added.

New stimulus measures may cause future fluctuations, chased again by the profit-taking seen last week. But overall, China's markets are expected to keep growing. The Shanghai index should "consolidate" this quarter between 3,800 and 4,500, an analyst at KGI Securities in Taipei said. 

"The previous upward trend was pretty fast, and some investors wanted to cash out their profits," said Zhao Xijun, deputy finance school dean at Renmin University in Beijing. "Investors' core motivations haven't changed. We hope markets go up steadily, not with sharp fluctuations."

Short-term foreign investors can buy shares on the dips though one of the qualified foreign brokers. A level of 4,000 on the Shanghai index would be a good "buying point," KGI economist Andrew Tsai said.

But market analysts suggest a longer-term approach for foreign investors, including exchange-traded funds such as NYSE-listed market vectors ChinaAMC A-Share ETF (PEK) or FTSE China A50 ETF (AFTY).

Many of China's top A-share firms also trade in American depositary receipts. Investment in top-50 companies such as financial giant Ping An Insurance (PNGAY) or automaker Great Wall Motor  (GWLLY) would effectively give offshore investors exposure to the Chinese market.

Indices in Hong Kong, South Korea and Taiwan are also seeing "spillover" from the China boom, Credit Suisse (CS) said in an April 23 research note. Companies listed in those markets depend heavily on business from China's growing economy, while the markets themselves are less volatile and easier for Western investors to access.

"We favor the North Asian equity markets, which we expect to benefit from China's intensified policy easing and reforms as well as the global cyclical recovery," Credit Suisse said April 30.

This article is commentary by an independent contributor. At the time of publication, the author held no position in the stocks mentioned.

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