In August last year, the IMF officially ranked China as the world’s second largest economy, taking possession of the title Japan has held for over 40 years. Following the introduction of market-based economic reforms in the late 1970s, the country has become the world’s fastest growing major economy, the world’s largest exporter and second largest importer of goods.
China is also the world’s largest car market and biggest energy consumer and is the most populous state in the world, with over 1.3 billion citizens. Analysts predict that the economic superpower is slated to become the world’s biggest economy, taking the top spot from the US between 2020 and 2030.
Two stock exchanges operate independently in China – the Shanghai and the Shenzhen Stock Exchange. As at the end of 2010, Shanghai’s bourse had 1,500 listed securities and 894 listed companies, with a combined market capitalization of CNY17.9 trillion (US$2.77 trillion) and a total of 98.51 million trading accounts.
There are currently 11 Islamic/Shariah compliant funds that have investments in Chinese markets. The bulk of these funds are heavily concentrated in Hong Kong stocks, China’s H-shares (Chinese stocks listed in the Hong Kong Exchange) as well as the Taiwan market. Prior to 2002, foreign investors were only allowed to purchase these types of shares.
A-shares, comprising of stocks of mainland China-based companies trading on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, were previously only available to domestic investors as the Chinese authorities wanted to exercise tight capital controls to restrict the movement of assets in and out of the country.
In 2002, the Chinese authorities launched a tightly regulated Qualified Foreign Institutional Investor (QFII) program that permitted foreign investors to buy and sell yuan-denominated A-shares in the two bourses. The China Securities Regulatory Commission website listed 68 QFIIs as at the end of September 2009. The advantage given to QFIIs is that they are provided with stocks from a wider choice of sectors that are not available in the H-share market; such as automotives, utilities, precious metals and minerals.
As of June, there were over 1,300 A-shares listed in the two stock exchanges, compared to 134 H-shares.
One manager of an institutional Islamic fund was quoted as saying that the preference was towards H-shares that are listed in Kong Kong as there was a lack of transparency in the Shanghai market as well as being a mainly ‘retail-driven’ index.
The first Shariah compliant fund to offer direct access into China’s A-shares market was the Hwang-DBS AIIMAN A20 China Access Fund (Vol 8, Issue 27). The fund leverages its investments through five QFII holders to obtain exposure to China’s domestic equities.
China’s economy has not been spared from the side effects of its exponential growth. A major concern is its rising inflation rate and over the last nine months, authorities have raised interest rates five times as well as increasing banks’ required reserve ratio as much as nine times. Such stringent measures have created little impact and the country’s inflation rate has soared to 6.4%, a three year high.
The other concern suggesting a slowdown in China’s economy comes in the form of July’s data from the Chinese government’s official Purchasing Managers’ Index (PMI), which dropped 0.2 points from 50.9 in June. HSBC China PMI painted a bleaker picture with a fall from 51.6 to 49.3, the lowest since March 2009. The PMI tracks business conditions in factories before the release of the official monthly output data.
Despite the softening economy, analysts still expect China to experience continuous growth in the long-term due to its robust domestic demand. The slower growth is expected to lower the inflation rate to reasonable levels and cause the market to move back up. Perhaps now is the right time for more Islamic funds to invest in China’s A-shares market and capitalize on the uptrend ahead.