Foreign Investors Rating among A-shares with highest A+ grade expected to rise 20% in second half 2023
Months before the outbreak of Covid-19 pandemic China had removed investment quota on Qualified Financial Institutional Investor (QFII), and trading bands for Hong Kong Stock Connect (accessing China’s A-shares from HKEx) also increased as China Securities Regulatory Commission (CSRC) vying to attract foreign investments. 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 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 were ranked highest in returns for 2020, the Shenzhen Stock Exchange rose 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) had exceeded RMB 70 trillion (USD 12 trillion), second largest after the U.S. The active and liquid trading in the Chinese stock markets is huge motivator for foreign stockbrokers and financial institutions to initiate a broader and comprehensive research coverage in recent years.
Under such pretexts, China Knowledge has launched a barometer and rating system to boost the urgency and relevancy of investor relations (IR) of China’s listed companies; and such ratings allow foreign investors to grasp how these companies perform in these areas.
Last month, foreign investments in A-shares accounted for about 3.0%. With global institutional investors recalibrating their global portfolio, China is likely to receive greater foreign interests as appetite for Chinese stock markets’ relatively lower valuation in earnings compare to most peers in the developed countries. Furthermore, to reach the level of 20% or more of foreign investment in most developed economies, half of that at 10% (from current 3%) could translate into USD 1.33 trillion – 2x of entire Singapore Stock Exchange’s market capitalization).
As of March, among some 4,600 China-listed companies, a total of 146 obtained either ‘A+’ or ‘A’ rating. Of all 30 industries, as defined by CSRC, the Top 5 Industries that attracted the most foreign investments were Home Appliance (approx. 9%), Food & Beverage, Electrical Equipment, Construction Materials, and Commerce.
Recent weeks of active trading in the Chinese stock markets that regularly exceeded RMB 1 trillion (USD 145 billion) a day makes it the second most active trading stock market in the world, after the U.S.
Very large block trade has risen in March, with Saudi Aramco as example that committed a USD 3.6 billion stake in Rongsheng Petrochemical (002493) on Mar 26, though subject to CSRC’s review and approval, the deal is seen as a win-win for both parties. Many local fund managers expect more of such substantial block trade would rise in Chinese companies that offer lower valuations than foreign peers.
With China’s recent opening to foreign visitors in Jan this year, the country’s stability and active promotion of international trade and as peace negotiator among conflicted states are some of the pull factors that make the Chinese market a safer bet as a country.
About Foreign Investors Rating
In 2016 China Knowledge established a rating system that performs meticulous studies of China-listed companies’ handling of foreign investors relation (IR), and monitor English news and published research that could impact a company’s shares performance. Later, metrics to measure IR management and communication with foreign institutional investors were included. The highest scoring of ‘A+’ to lesser ‘A’, ‘B’, ‘C’ and ‘D’ are allocated every month to each company. The ratings definition as 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.
To obtain latest monthly copies of ‘Foreign Investors Rating’ on some 4,600 A-shares, simply find an A-shares company’s rating report by ‘China Knowledge’ in Bloomberg, Refinitiv, Interactive Brokers, FactSet, S&P Capital IQ, Dow Jones Factiva or other licensed trading platforms.
For more information, please contact:
Michael Lee, Senior Director
Research & Ratings Syndication
Christina Wang, Managing Director
Research & Ratings
Catherine Yap, Director
Research and Ratings Syndication
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