Shanghai stopover

In the first week of july, a motley crew of policy makers, regulators and market experts set out on a trip to China. Their objective? To find out how different the Chinese financial markets are from the ones back home. The delegation comprised two Finance Ministry officials—Arun Ramanathan, Secretary, Department of Financial Services and K.P. Krishnan, Joint Secretary (Capital Markets); M.S. Ray, Executive Director, Securities & Exchange Board of India (SEBI); Gagan Rai, Managing Director & CEO, National Securities Depository Limited (NSDL); and Ravi Narain, Managing Director, National Stock Exchange. The group met up with senior officials at China’s Finance Ministry; the market regulator— the China Securities Regulatory Commission (CSRC); the banking regulator—the China Banking Regulatory Commission; and the Shanghai Stock Exchange.

Interestingly, this interaction comes at a time when Chinese investors have started looking at India as an investment destination. In January this year, the China International Fund Management Company registered with SEBI as a foreign institutional investor (FII). BT learns that a few Chinese sovereign wealth funds have also started investing in India.

The delegation discovered that the Chinese market faces a similar set of challenges and issues in terms of the effectiveness of capital controls. Both sides seemed to agree that capital controls do not work. “Unless you can figure out why it is coming into the country, no matter how much control you impose, money will come in, anyway,” says a person familiar with the developments during the China trip.

Indeed, there are a lot of similarities between the financial markets of the two economies. For instance, during the past 2-3 years both economies got disproportionate investments from FIIs, who drove share prices to record highs in both markets. Since 2006, the Chinese market has become more open to foreign investors; this was enabled by increasing the quota for investments by FIIs, and relaxing the entry and exit rules for foreign investors. Such liberalisation saw China and India become the best performing stock markets across Asia in 2007. The Morgan Stanley Capital International (MSCI) Index for China and India gained 63 per cent and 71 per cent, respectively, in that year. The downturn has been equally sharp for both markets—India and China have been the worst performers in Asia ever since global markets turned volatile in January. For the year, till July 16, the MSCI China and India indices have fallen 30 per cent and 46 per cent, respectively.

Clearly, bearish times are as good a time as any to take home learnings from foreign markets.

—Rachna Monga