NEW YORK -(Dow Jones)- Those interested in the incredible potential of China 's capital market better bring their helmuts for what looks set to be continADVERTISEMENT
ued volatility over the next several years.
Chinese financial market experts gathered Thursday at an Asia Society conference, some to talk up the remarkable opportunities taking shape in the Asian giant, and others to talk them down.
Since China became a member of the World Trade Organization late last year, foreign financial services companies have a chance to participate in a market with a savings rate equivalent to 39% of gross domestic product, which grew about 7% in 2001. With some sixty million investors eager to earn more on their money than the paltry 2% interest they receive on bank deposits, and over 1,200 listed companies with a market capitalization of $520 billion, or half a GDP, many won't want to miss out on what appears to be explosive growth potential.
That the country is undertaking a reform of its pension system, allows insurance companies to invest up to 15% of their premiums in domestic stocks, and is opening up fund management to foreign investors, only makes the market more tantalizing.
But there are strings attached. And those strings are holding back many foreign investors, whose investment options at this point appear rather limited.
Foreign investors are only allowed to invest in the B-share market, which represents just 3% of the total market capitalization. Many of these shares are owned surreptitiously by domestic investors, said Howard Chao, a partner at O'Melveny & Myers LLP, an international law firm.
"The failure of the B-share market to attract significant foreign investment is one indication of the poor quality of disclosure and accounting standards of Chinese listed companies, and a lack of investor confidence in their corporate goverance," he said. Well known are the volatility and manipulative trading practices prevalent in China 's stock market, he added.
Nor has the stock market done much good for private domestic companies looking to fund their expansion, as very few have been permitted to list, Chao said. Sixty-five percent of shares of companies listed in China are government owned and not tradable.
"The stock market hasn't yet played any significant role in funding the corporate sector," said Nicholas Lardy, senior fellow at the Brookings Institute. Nor has the debt market, which is primarily composed of government and unlisted financial institutions issues.
While the securities regulator has been aggressively trying to clean the market up and improve the legal and regulatory infrastructure, "serious structural problems (still) exist in the domestic equity market," said Vincent Duhamel, who heads State Street Global Advisors Asia investment business. "Most significant is the scarcity of high quality and large cap companies that can anchor the market."
The equity market has been used to finance designated state-owned owned enterprises - many of which were financially stressed. One result is that "the equity market was saturated with low quality and small-sized companies," he added.
If the domestic pickings are slim, some potential local fund management partners don't appear very sincere, Duhamel suggested: "We are finding that fund management companies are least inclined to share benefits with foreign partners. They are looking for help from foreign partners to build up the infrastructure and to enter into new business areas such open-end mutual funds, but they are very reluctant to share with their foreign partners the revenue/benefit from their existing very profitable business."
Under China 's WTO entry conditions, foriegn fund management firms can purchase 33% of a local partner, and up to 49% within three years. Also within three years, foreign financial services companies will be able to hold 33% of a securities firm licenced to underwrite domestic share issues.
Chinese authorities are clearly anxious to bring foreign know-how on board, especially in their effort to reform an insolvent pension system. Sun Jianyong, deputy director general at the ministry of labor and social security, said " there's a severe lack of expertise" in fund and pension management. "We welcome the overseas Chinese to go back and help the development of pension reform, which will become market and capital market-based."
But Sun skirted a question on when the government would allow private managers to help oversee pension accounts. The country aims to move from a "go as you pay" system to one that is a "paid-reserve" or individually funded or system.
"Financing the transition is a huge problem, and you aren't seeing any sign of accumulation of funds," said Lardy of the Brookings Institute. For those who thought the pension reform would soon result in a boon to the stock market, he didn't "see the pension system as a driver of the equity market in the short- term. The pension system is completely bankrupt."
Raising "the underground," unregulated asset management business - worth tens of billions of dollars - into the open market might represent one potential boost to the stock market, panelists suggested.
As for insurance companies, even though the insurance penetration is still very low at under 0.5%, "the total premium is reaching $60 billion and is growing at more than 30% annually," said State Street's Duhamel. "With the WTO accession and much more active foreign participation, we expect accelerated future growth."
But, again, it's not without its bumps. Although insurance companies can invest up to 15% of their premiums in domestic equities, they can only do it through the 48 listed closed-end and open-end mutual funds, Duhamel said. "Since it's very inefficient to get the equity exposure through this type of retail products, we expect that future regulation will allow insurance companies more direct access to the equity market through segregated accounts either managed by their own investment management subsidiary or external fund/asset management companies."
On the debt side, a lack of longer term government bonds hampers insurance companies' efforts to match their long-term liabilities with long-term assets, said Xing Yi, a general manager at Ping An Insurance.
-By Charles Roth, Dow Jones Newswires;
Friday May 10, 8:29 am Eastern Time BMW's New CEO Sees Sales in Asia Doubling in 5 Years By: Richard Borsuk, Staff Reporter of The Wall Street Journal
SINGAPORE -- The incoming chief executive of BMW AG said the German auto maker can double its sales in Asia within five years.
Helmut Panke, who will take charge of the Munich -headquartered BMW, told The Asian Wall Street Journal on Friday that while Asian sales are steadily increasing, the region is "underepresented" in the company's global revenue picture. Last year, Asia accounted for 2.4 billion euros, or 6.3% of total sales of 38 billion euros. "We will increase our footprint" in AADVERTISEMENT
sia, said Mr. Panke, currently BMW's chief financial officer.
Meanwhile, BMW said that its global sales rose in April by 25% to 94,827 units from 76,029 units in April 2001 , with growth in all its major markets.
In the January-to-April period, 355,303 units were sold, compared with 297,807 units in the same period a year earlier, the car maker said. The figures include sales for the BMW brand and the Mini brand.
During a visit to Singapore , he said the numbers of cars sold and the revenue from Asia in 2006 should be the 2001 levels. In 2001, BMW sold 61,756 cars in Asia, compared with 58,250 in 2000. Among markets that grew the most were China , which increased 51% to 5,742 cars and South Korea , where the number rose 67% to 2,717. (According to BMW, China and Hong Kong combined formed the second biggest Asian market last year after Japan ; previously, Taiwan was the second largest.)
This year will be a good one for Asian and all BMW sales, Mr. Panke said. In
the first four months, the number of cars sold in Asia was 22,090, a 14% increase from the same period of 2001.
Mr. Panke said BMW is "getting positive signals" from authorities in response to its bid to get a manufacturing license for China together with a local partner. Business in China is "on a good track" but will be expanded "step-by- step" rather than rapidly, he said.
The auto executive expressed confidence that high import tariffs on cars in Southeast Asia will be slashed in line with provisions of the Asean Free Trade Area pact. Scheduled cuts have been delayed by Malaysian moves to delay the reductions and help its home-grown car, the Proton.
Due to the delay in cutting tariffs, production at BMW's wholly-owned assembly plant in Thailand has been held back. For when the AFTA pact comes into effect, "we have to be positioned, from early on," Mr. Panke said.
Some media reports have speculated that BMW, whose cars are imported into Malaysia , intends to make an investment of some kind in that country. Mr. Panke said only that the company is "in discussions" there to evaluate its options.