In the 1950s, retail investors accounted for more than 90% of ownership of the US share market, according to Citic Securities. That percentage has dropped to less than 10% as institutional investors have taken over.
China’s A-share market has been showing signs of becoming a more mature marketplace as well.
Data from the same brokerage shows that individual investors held as much as 72% of the free float in 2014 but that the proportion has since dropped to less than 30%.
Institutional holdings are increasing, in part because it is getting more straightforward for foreign investors to own A-shares. Overall holdings are still low at about 3% of tradable shares. But that is still a significant increase on 10 years ago and regulators are continuing to make it easier for global asset managers to buy into the market.
For instance, the investment quotas and foreign exchange limits under the Qualified Foreign Institutional Investors (QFII) and Renminbi QFII schemes were both formally scrapped this month and Stock Connect schemes now offer an easier way for offshore capital to invest in A-shares via the Hong Kong bourse.
According to Securities Times, foreign investors have invested in 2,148 A-shares via the Stock Connect schemes (local media outlets generally refer to these institutions as “northbound investors” or “northbound capital”). Stocks that play to the domestic consumption theme are some of the most favoured: among the top 10 A-shares with the highest foreign shareholding, three are white goods makers – Midea, Gree Electric and Robam Appliance (see WiC402). Foreign investors own more than 15% of each of the trio, translating to market exposure of nearly Rmb130 billion ($18.2 billion).
As of this week, Suofeiya Home Collection, which makes home furniture, topped the ranking with 21% of issued capital snapped up by overseas shareholders. Centre Testing International (CTI), a testing and verification services provider, was second at 19.9%.
Foreign ownership levels in some of these firms has approached the regulatory limit. Last month the Shenzhen Stock Exchange warned that overseas holdings in Midea, CTI and Suofeiya had all reached 26% (aggregating positions from the Stock Connect, QFII and RQFII schemes). The ceiling is 30% and stock regulators stop foreign investors from adding new positions once the threshold reaches 28%.
The Shenzhen bourse issued a similar alert in March for overseas holdings in Midea, which dropped below 28% briefly before picking up again in the second quarter.
Both CTI and Suofeiya were founded in 2003. The former was one of the debutants on Shenzhen’s ChiNext junior board in 2009, while Suofeiya went public on Shenzhen’s main bourse two years later.
Over the past 11 years, CTI’s market value has jumped more than seven times to nearly Rmb30 billion (which is 70 times its 2019 earnings). It puts out more than 2.5 million reports every year, with its 130 laboratories offering a range of different tests in areas including hazardous substances, food safety and material reliability.
Suofeiya made its name by offering services that allow for more customised selections of furniture and it was the first of the companies of its type to go public.
Sales in the furniture sector in general have been constrained in recent years by local government restrictions on home purchasing, which has reduced demand for new flats.
However the sector looks like becoming more of a bright spot for domestic consumption again. Last year Alibaba invested Rmb4.36 billion in convertible bonds issued by Red Star Macalline, one of the biggest furniture and home product retailers. The deal could see the internet giant take ownership of 14% of Red Star, which operates 364 home-furnishing malls across 199 cities.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.