Friday 14 November 2008
Private Equity and QFII Returning to A-Share Market
The A-share market has shrunk drastically, and private equity funds are giving up pre-IPO, switching to acquiring listed company shares through bulk trading. This highlights the reality that China at present lacks long-term investment opportunities. An appropriate monetary policy might lead more such funds to return to the stock market in the short term.
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Private Equity and QFII Returning to A-Share Market
14 November 2008
The A-share market has shrunk drastically, and private equity funds are giving up pre-IPO, switching to acquiring listed company shares through bulk trading. This highlights the reality that China at present lacks long-term investment opportunities. An appropriate monetary policy might lead more such funds to return to the stock market in the short term.
Doholdcapital, a Chinese private equity fund set up in June this year, recently announced that it would adjust the focus of its investment, changing from the pre-IPO market to listed companies. The fund will buy shares or directly acquire shares of listed companies through bulk trading or share rights transferral. The earnings ratio of pre-IPO projects was 15 to 20 times one year ago, but now the average earnings ratio of A-shares has dropped to 14 times. At the prices in the secondary market in October 2008, with only 110 million yuan one investor could become the largest shareholder in 79 listed companies. The risk of integrating mature companies through the stock market appears to be smaller.
With private equity capital moving into the stock market, Qualified Foreign Institutional Investors (QFII) have also begun to open positions in the A-share market through bulk trading. The volume of 62 bulk trades on the Shanghai and Shenzhen Stock Exchanges last week hit a record for the year, driven by the 4 trillion yuan investment plan announced by the Chinese government. The popularity of bulk trading may not be good news. Against the background of present strict monetary policy from commercial banks, the flow of funds to the stock market might create a bubble in the near future.
Although exact details of the government investment plan over the next two years have not been announced, it is clear that investment will focus on infrastructure and people’s livelihoods, along with traditional industries such as railway transportation, shipping, and so on. A partner of a US private equity firm says that these industries are faced with insufficient growth and that state-owned enterprises could get the main benefit, and it is hard for private equity and foreign capital to find suitable long-term investment opportunities.
However, these private funds and QFII are convinced that the Chinese government has the determination to improve the economic data. For the central government, the introduction of the stimulus program first functions as a signal. The results of any specific investment project will not be complete in one or two months. But finance and loans from commercial banks to related projects will strengthen such signals. Central bank insiders recently revealed that it will guide policy banks to add an additional 100 billion yuan in loans by the end of the year and encourage commercial banks to provide related loans for the projects invested in by the central government. Analysts point out that as the banks are still reluctant to lend, supervision departments may set a minimum line of credit for commercial banks in order to promote monetary expansion in the coming year.
A wide range of resources and information superiority will result in the response of private capital to the strong stimulus of the central government. Under the current background of high concentration of investment opportunities in traditional fields, a return to the stock market may be their choice by nature.
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