Taking Stock in China: Beijing Beckons, but Will Foreigners Buy?

What if China’s stock regulator threw a big party to welcome individual foreign investors and nobody came? That’s the question at the center of this week’s column, which takes us slightly off the regular beaten track of doing business in China and explores a side issue of how those of us living and working here use our idle cash.

That question was moot for a long time in China’s current era of market economics, since most foreigners living and working here were paid in foreign currency until only the last decade or so. That meant that most expats had minimal renminbi, the local currency, and instead sent most of our excess cash directly home to offshore banks.

That began to change about a decade ago, and I can specifically remember when one of my previous employers began offering us the option of getting some or all of our salaries in renminbi right around 2006 or 2007. Back then the Chinese currency had just been allowed to start floating after being pegged to the U.S. dollar for years, and many people quickly elected to get paid in a currency that appeared to be on a one-way appreciation trend.

Of course the picture is much more nuanced now, and the renminbi, also called the yuan, goes through phases of appreciation and depreciation, much like most other currencies, albeit in a tightly controlled manner. Regardless of that, the big majority of my expat friends and acquaintances here now get most or all of their salaries in local currency. That means some of us might consider parking that extra money in local investment products if suitable ones were available.

That brings us to this week’s topic, which is news from last week that China may soon open up its tightly controlled A-share market to foreigners living and working here. Up until now, the market has been closed to the large majority of such individual foreign investors.

That prohibition was always a convenient excuse to give my Chinese friends who would frequently ask if I was interested in their market. “Perhaps, but China won’t let me open an account,” was my usual reply. In reality, I probably wouldn’t have considered such an option even if it were allowed. China’s stock markets have always vexed me, since they seem more powered by rumors and speculation than the kind of financial fundamentals that most investors use in Western markets.

No more excuses

But soon I won’t have that excuse anymore, which has forced me to rethink my own position on the issue. I also polled a number of foreign friends and acquaintances who have been here a long time, and got a surprisingly wide range of answers. I asked everyone first whether they would buy China stocks if allowed, and then whether they thought Beijing would make opening such accounts easy for us if and when that happens.

In response to first question, a majority of respondents answered “no.” One, who somewhat aptly came from the gaming industry, replied coyly that he would rather invest his money gambling in Macau, the implication being the odds of getting anything back were roughly the same and that gambling at a casino is more fun.

But among more serious respondents, most said lack of faith in the accuracy of financial reports from Chinese companies was the main deterrent. One pointed to several recent short-seller attacks on U.S.-listed Chinese stocks as reflecting an even bigger lack of credibility for domestically listed shares, whose financial reports are rarely questioned by China’s overtaxed securities regulator.

While the “no thanks” group was in the majority of my small polling sample, I was also surprised by a small but significant group who said they might consider dabbling in the market. One pointed out that while most of China’s listed companies were traditionally big state-owned behemoths whose closets were filled with skeletons, there are many more Western-style high-growth startups these days without such baggage and better accounting practices.

That same contact pointed out that a number of such companies were previously listed in New York, and privatized over the last three or four years before relisting at home to get higher valuations. Those names include the likes of outdoor advertising specialist Focus Media, hotel operator Homeinns and security software specialist Qihoo 360. If those stocks were good enough for us when they traded in New York, then why shouldn’t they be equally attractive in China, he reasoned.

There’s certainly some logic to that argument. And the more I thought about it the more I realized I am probably moving from the “no thanks” camp to a new group that says we might try China stock buying on a limited basis, much the way you might put a small portion of your money into high-risk investments with potential for big returns.

As to whether China will make it easy for those of us with that kind of risk appetite to invest, most of the people I polled weren’t too optimistic. After all, China has a history of rolling out big new programs making life more convenient for foreigners with lots of fanfare, only to put up so many obstacles that nobody ever gets to take advantage of the new perks.

Some people also noted that the timing of the current program could be aimed at propping up China’s stock markets, which are some of the worst-performing this year and officially entered bear territory last month. I personally doubt that’s the case, since such a plan was probably being discussed long before the current bear market took shape.

At the end of the day, I do think that such a plan will go ahead and get limited positive reception from a group of foreigners willing to try out the market on a limited basis. But like everything else in China, it will probably be at least five to 10 years before such foreign participation has any real impact on the nation’s volatile stock market.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to DougYoung@caixin.com