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December 3, 2012

China Equity Market Hits Three-year Low Despite Positive Indicators

by Xav Feng.

REUTERS/Nir Elias (CHINA)

Despite improving economic data and the biggest fund inflows among all Asian countries in Q3, China’s leading index — the Shanghai Stock Exchange Composite Index– fell below 2,000 points and hit a three-year low at the end of November.

According to Lipper FMI’s data, China has registered the biggest fund net sales among all Asian countries, with an inflow of $USD 17,457.8 million. China’s economy grew 7.4% in the third quarter compared to the previous year and experts expect its economy to continue to strengthen due to an improving PMI index and robust export activity.  China is also preparing for a change in leadership at the top, as Xi Jinping assumes power for the next decade after the 18th Communist Party Congress.

It is clear that hot money poured into the Greater China Region in late October and early November. The Hong Kong Monetary Authority (HKMA), the city’s de facto central bank, stepped into the money market for the 10th time over the past two weeks as hot money continued to flow into the city. Hong Kong stocks hit a 15-month high, breaching the 22,000 level for the first time in 15 months. Most of the hot money parked in Hong Kong is also aimed at China because of improving economic data and high expectations for the new leadership.

The China Securities Regulatory Commission has now granted a total of 192 foreign investors licenses under the Qualified Foreign Institutional investor Scheme (QFII Scheme). The regulators continue to open their arms to foreign institutional investors. However, QFII only takes less than a 1% market share for all the China A share market and hasn’t played a dominant role. Moreover, there has been no concrete economic stimulus policy unveiled following Xi’s elevation to the leadership role. With a disappointing and fragile faith, China market has suffered another bear market.

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