Qualified overseas mutual funds may see new encouraging measures in short-term trading

The China Securities Regulatory Commission, the country's top securities regulator, is mulling to relax short-term trading rules for foreign investors in the A-share market, a move experts said will facilitate greater inflow of foreign investment and further encourage trading activities.

According to relevant regulatory authorities, the CSRC is studying the introduction of two specific trading policies catered to foreign institutions' short-term trading in the A-share market.

According to China's Securities Law, proceeds that a public company's shareholders or members of the board obtain from selling the company's stocks six months after the prior purchase, or the other way round, will be taken back by the company's board of directors, as long as the trading participants hold at least a 5 percent stake in the listed company.

But the Securities Law has authorized the CSRC to set exemption scenarios. Domestic mutual funds holding a 5 percent stake in a public company have been excluded from the above restrictions since January 2007 to encourage investment. The country's social security fund is also exempted from the restrictions on short-term trading.

Under such arrangements, foreign institutions are on equal footing with domestic mutual fund companies concerning short-term trading, which will facilitate their deeper reach into the A-share market, said Tian Lihui, director of the Institute of Finance and Development at Nankai University. Trading activity in the A-share market will be thus boosted and the trading mechanism more internationalized, he added.

Hong Kong Securities Clearing Company (HKSCC) will also be exempted from certain short-term trading regulations, said the CSRC.

As explained by Yang Delong, chief economist at First Seafront Fund, HKSCC was defined as the "nominee holder" by the CSRC in 2015 under the stock connect mechanism between the Shanghai, Shenzhen and Hong Kong bourses.

In other words, foreign investors' trading of A-shares via the stock connect program is all calculated in the name of HKSCC. It is easy to identify HKSCC as conducting short-term trading ostensibly without closer scrutiny of the actual trading entity. The new policies will remove this obstacle and introduce more foreign capital inflow into the A-share market, he said.

Net capital inflow into the A-share market via the stock connect mechanism totaled 52.2 billion yuan ($7.2 billion) in the first nine months of the year, according to market tracker Wind Info.

The A-share market embraced a fifth consecutive trading day of gains on Monday after the CSRC's announcement. The benchmark Shanghai Composite Index climbed 0.42 percent on Monday while the Shenzhen Component Index rose 0.36 percent.

As understood by Tony Tang, BlackRock's head of China operations, investment in Chinese assets is of unique importance to international investors' asset allocation given that China's economic quality is comparable to developed markets and growth potential is similar to emerging markets — characteristics that can be found nowhere else.

Salman Ahmed, global head of macro for Fidelity International, said that A-share companies' profitability is expected to improve in the fourth quarter as economic growth further recovers and commodity prices decline. Market sentiment will also pick up, he said.

Domestic institutions also hold a positive outlook. At least five domestic mutual fund companies, such as China Universal Asset Management, announced on Monday they are purchasing their own equity-focused products given their "confidence in the Chinese capital market's healthy and stable development in the long run", a consensus found in their announcements.