Merely 6% China-listed companies graded ‘A+’ on Foreign Investors Rating, 85% need buck up IR to garner 10% foreign ownership
The investment quota on Qualified Financial Institutional Investor (QFII) was removed last April, and trading bands for Hong Kong Stock Connect (accessing China’s A-shares from HKEx) increased are seen as major steps that the China Securities Regulatory Commission (CSRC) has taken to attract foreign monies into the country domestic stock markets. Other similar measures were also introduced by the State Administration of Foreign Exchange (SAFE) and the Shenzhen and Shanghai Stock Exchange. Most importantly, the highest governing body, the State Council has also given clear instruction to encourage greater participation of foreign investors. Aptly put it, President Xi has reiterated in mainstream media that ‘China will uphold openness, and unswervingly expand in opening up so that the Chinese market will become a global, shared market – it’s everyone's market’.
On positive notes, China stock markets are ranked highest by returns in 2020 (Shenzhen Stock Exchange, up 36%) and Shanghai placed in the world’s top 10, and A-shares’ total market capitalization (excluding HK, Taiwan and Chinese companies listed outside China) has exceeded RMB 70 trillion (USD 12 trillion), and currently the second largest after the U.S. The active and liquid trading in the Chinese stock markets are huge motivator for foreign stockbrokers and financial institutions to initiate a broader and comprehensive research coverage. In contrary, and partly attributed to the global pandemic, the progress isn’t in tandem with the momentum of China’s stock markets. Its newly established sci-tech board known as STAR Market (a Nasdaq-like exchange), has seen some 145 hi-tech and new-economy companies went public. Together, the China’s 620 IPOs that were launched last year had raised RMB 555 billion (USD 85 billion), largest in the world.
In spite of all the large-scale figures, the current foreign ownership in A-shares is less than 4%, a far cry from U.S. of about 20%, and other developed equity markets worldwide with average exceeding 20%; a noteworthy market would be the laissez-faire HKEx of over 70%. Assuming a 10% in proportion could translate into USD 1.1 trillion of foreign investment in its stock market.
Under such pretexts, China Knowledge has launched a barometer and rating system to boost the urgency and relevancy of investor relations to listed companies; and, externally such ratings allow foreign investors to grasp how China-listed companies perform in these areas.
In 2016 China Knowledge established a research to conduct meticulous studies of China-listed companies’ IR, and monitored English news and published research that could impact a company’s shares performance. Later, metrics to measure IR management and communication with foreign funds were included. In Q3 2019, some 95% of A-shares were filtered using these metrics and rated from the highest scoring of ‘A+’ to ‘A’, ‘B’, ‘C’ and ‘D’. The ratings definition are explained below:
A+: To make it to the highest rating, a company must have foreign investment proportion higher than the average of all A-shares and its industry’s average. Its latest month should see an increase of more than 3% in foreign investment over previous month, or a net growth rate higher than A-shares ’ average over a period most current 3 months. On the qualitative aspects we assigned foreign investor relations performance metrics to the overall scoring. We find companies rated A+ in most current quarter as sound investment for foreign institutional investors.
A: The company’s proportion of foreign investment is either higher than the A-shares average or its industry’s average. It must see positive net growth over the latest 3 months.
B: Its foreign investment is lower than the average of all A-shares and its industry’s. Its latest month has either declined or remained the same level. Performance on foreign investor relations’ metrics has little impact on overall scoring due to very small proportion of foreign investors and the total sum invested.
C: This rating shows little or almost no foreign investment. Its proportion of foreign investments is below all A-shares’ average and industry’s average in its latest 3 months. Scoring on foreign investor relations’ performance metrics is insignificance if the foreign investors are not participating in investing the company.
D: This lowest rating is given to company that failed to meet all 5 core benchmarks. It shows zero or no foreign investment, has poor coverage in both domestic and foreign news, and very few Chinese or English analysts’ reports. Its IR management does not meet professional standards.
The latest monthly rating statistics show merely 6.1% are rated with an ‘A+’ which performed best among 3,820 A-shares companies. Though there are some 4,300 A-shares, those that are classified ‘Special Treatment’ or ‘ST’, and newly listed companies of less than 6 months are excluded.
Only those rated with an ‘A+’ or slightly lower grade of an ‘A’, which totaled 588 stocks (15.3%), are considered to meet the criteria of foreign investors’ standard performance in terms of foreign news media exposure and relatively well-performed IR services.
As China endeavors internationalization of its financial market, and our company’s advocacy to connect A-shares to global investors, an upgrade of some 70% or more listed companies to reasonably ‘A’ rating is seen as necessary to garner foreign investors’ interests and gain knowledge on China domestic stock markets.
To obtain latest copies of ‘Foreign Investors Rating’, please click on the following links:
White Paper on Foreign Investors Rating
Refer to link: www.chinaknowledge.com/download/whitepaper/FIR_ENG.pdf
About China Knowledge:
Founded originally as a Singapore-based publisher and research firm in 1999 covering China’s economy, industries and financial markets; over the decades, China Knowledge has evolved and developed into a proprietary financial analytics, ratings and alternative data provider on China’s bonds, equities, mutual funds, trusts, commodities and all related segments. Today we have become the biggest research, alternative data and specialized ratings publisher on China’s A-shares as seen in Bloomberg, S&P, FactSet, Thomson Reuters, WIND and on other licensed vendors.
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