The Yuan, Scrips Supply & Funds' Outlets

HK shares had a huge fillip just before they went for the Tuen Ng festival holiday (the most meaningless holiday in the Chinese calendar), guess somebody knew something before the actual announcement. Yesterday, the turnover of HK stocks exceeded HK$120 billion for the first time as the blue chips and H shares set fresh records. The good news for the local shares came as the China Securities Regulatory Commission announced on its Web site that mutual funds and securities houses will be allowed to invest in Hong Kong stocks for the first time starting July 5. Banks had been granted permission on May 11 under the qualified domestic Institutional Investor (QDII) scheme. Among the mainland mutual funds and securities houses, only Hua An Fund Management had received a QDII quota of US$500 million (HK$3.9 billion).

Meanwhile the International Monetary Fund seems to have exerted more pressure on Beijing to revalue the yuan by changing its monitoring policies. The new rules, released last Friday, were aimed at overhauling its exchange rate surveillance program, under which IMF asks member nations to avoid exchange-rate policies that result in "external instability" as well as refrain from currency manipulation and foreign exchange intervention.

"China has expressed reservations about the adoption of this decision, as it does not fully reflect the developing countries' opinions," the People's Bank of China said yesterday. The Washington-based IMF is an international organization of 185 countries that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical aid. China said IMF should take into full consideration the fundamental impact of economic globalization, and to value the relationship between domestic economic stability and external stability.

Now the Chinese authorities have two problems. One is to prevent excessive speculation in the stockmarket, but also at the same time not have a meltdown. Secondly, to pacify US lawmakers on the trade surplus solution. They were so scared when the stock indices started collapsing a couple of weeks back, that they had editorials of the 3 top newspapers printing the similar address: that stocks have been oversold. It was so obvious that the authorities were more concerned that there should not be a meltdown even though they are concerned of excessive speculation. The authorities are now more aware not to scare the stock investors via sudden fiscal hikes. Hence they have shifted their attention to providing more scrips supply and improve outlets for China funds. Outlets include the QDII scheme, and the just announced liberalisation to invest in HK shares as well. Encouraging more scrips supply, just look at the number of big companies coming to the market to issue more shares or bond issues.

Thirdly, the wave has started to get China companies listed in HK to move back to Shanghai. The first one should be PetroChina. PetroChina is planning to raise up to 43 billion yuan (HK$44.1 billion) by floating shares in the China A-share market to fund oil and gas exploration, build refinery facilities and make overseas acquisitions. The A-share listing - to take place as early as the end of August - would become the biggest initial public offering so far this year, eclipsing that of Ping An Insurance, China's second- biggest insurer, which raised 38.9 billion yuan when it listed March 1 on the Shanghai Stock Exchange. PetroChina shares rose as much as 8.2 percent Wednesday to HK$12.08 before closing at HK$11.74, a gain of 5.2 percent. The closing price valued the company at US$269 billion (HK$2.1 trillion), surpassing Royal Dutch Shell's US$257 billion to become the world's second-largest oil company. The mainland's biggest oil and gas producer will sell up to four billion shares in Shanghai. Following completion of the A-share offering, H shares will account for 11.53 percent of the total shares issued, down from 11.79 percent, while A shares will take up 2.18 percent. PetroChina, China Construction Bank (0939), China Shenhua Energy (1088) and China Telecom (0728) were the four Hong Kong-listed H shares which received special approval from China's State Council last week to list on the mainland bourse. While these supply measures will be greeted as positives by investors, in actual fact they bring on a lot more supply of share scrips. The bond issues also suck up some of the liquidity. While they may not ruin the bull run, these measures will act as a balancing lever to ensure a more gradual ascend for the Chinese bourses.

As for the trade surplus, Beijing has significantly reduced tax rebates on a huge list of items, which will hurt companies operating on labour intensive industries in China. The rebates reduction is a strong way to reduce surplus for the medium term, and to move companies and FDIs up the production value chain. The trade surplus may not be reduced immediately but these rules will ensure a medium term rebalancing. Yuan will be rising again significantly soon.