TUMBLING share prices and trading suspensions have tempered any early enthusiasm for Chinese equities among overseas funds, confirming the cautious approach evident in their limited exposure.

    Three government programs designed to help overseas investors buy Chinese stocks have had limited takeup and it will likely take a measure such as inclusion in more mainstream stock market indices for that to change dramatically.

    The recent 30 percent stock market rout has inevitably knocked confidence, prompting some to reconsider plans to buy Chinese shares, known as A shares, until they are included in globally followed regional indices, say industry participants.

    Jupiter Fund Management, for example, said it had held off buying A shares, preferring to bet on the H shares of Chinese mainland companies traded in Hong Kong, or Chinese stocks listed in the United States, which have not been as badly hit as their mainland cousins.

    “The [mainland] stock market is not functioning in a disciplined way,” said Stephen Mitchell, head of strategy, global equities at Jupiter. “The fact you can get a retail stock market bubble this quickly ... does affect people’s view of the A-share market.”

    The CSI300 index of the largest listed companies in Shanghai and Shenzhen hit an all-time high June 8, before slumping 32 percent through July 8, but H shares , more popular with international investors due to their greater tradeability, fell less.

    China-focused funds sold to foreign investors, most of which invest in H shares, lost only about 7 percent of the US$100 billion in assets managed at end-June, Lipper data showed.

    China has made attempts to improve international investors’ access to mainland shares but these have so far had limited success.

    An original program, called the Qualified Foreign Institutional Investor (QFII) program, allowed overseas investors to access stocks and other assets, albeit with many restrictions around trading.

    The subsequent more flexible RQFII program allowed funds to invest using the yuan, and Britain, France, Singapore and Germany were among those fighting to secure a quota from the Chinese Government.

    But in Britain, for example, just 25 percent of the country’s 80 billion yuan (US$13.07 billion) RQFII quota has been taken up by asset managers in London, equivalent to just US$3.2 billion.

    “I’ve visited a lot of London-based fund managers and the frequent response has been ‘we don’t understand the market,” said Stewart Aldcroft, senior advisor for fund services at Citi. “A lot of managers were able to miss out on the fall in value because they didn’t believe the rise.”

    U.S. universities and endowments made more use of QFII quotas than London’s asset management community, Aldcroft said. RQFII takeup in Germany and France was higher, but overall European demand remains relatively low, he added.

    By June 29, US$139 billion had been invested in the QFII and RQFII programs by foreign investors against a limit on both of nearly US$300 billion and a net capitalization of China’s mainland stock market of US$11.5 trillion before the crash.

    One successful RQFII applicant was Swiss fund firm Pictet, with a quota of around US$160 million awarded in December.

    As the share suspension was largely impacting smaller companies and startups, Pauline Dan, head of greater China equities at Pictet Asset Management, said her blue-chip bets were largely unaffected.

    “We think that the current disruption is temporary and hence have no intention to cut back on QFII investment,” she said. (SD-Agencies)