Walter Hutchens’ Blog

Mainland China’s stock markets have probably offered the highest returns of any stock market in the world this year. One would expect that to make the PRC’s markets a magnet for global capital. However the PRC’s stock markets are sealed off behind the Great Currency Wall of China. The PRC’s currency controls mean there are restrictions on capital flows into and out of China.

Currency controls prevent Warren Buffet and other foreign investors from simply ordering their US brokers (or a broker in Beijing) to buy mainland shares for them. Foreign investors are not permitted to freely buy shares in any of the 1,400+ companies that have issued A-shares in Shanghai or Shenzhen (A-shares are the RMB-denominated shares traded in Shanghai and Shenzhen). Likewise, PRC investors cannot freely buy shares in, say, Microsoft (or even in Chinese firms that have listed abroad, such as the Bank of China!).

There are however a few holes that have been intentionally drilled in the PRC’s Great Currency Wall. These include the Qualified Foreign Institutional Investor (QFII) scheme that lets some foreign capital into China’s stock markets and the Qualified Domestic Institutional Investor (QDII) system that lets some PRC capital flow into investments abroad.

As the names suggest, the QFII and QDII systems are for institutional investors, not individuals. You have to be a large financial entity to get QFII status; the system excludes individual participation. Or did until a few days ago.

Now the Morgan Stanley China A Share Fund is listed on the New York Stock Exchange, and its shares can be bought freely by individual foreign investors (or institutions without QFII status).

This is the first publicly traded fund in the US focused on China’s A-share markets. It provides an indirect, mediated way for people to participate in China’s booming domestic share markets.

The fund works because Morgan Stanley holds QFII status in China. They buy A-shares as a QFII, and investors can trade shares in the fund.

SAFE gave Morgan Stanley a USD 200 million quota as a QFII. This closed-end fund raised more than that quota; the overage, after fees, will be invested in stocks listed in Hong Kong or on the mainland’s B-share markets (B-shares are listed on mainland exchanges but denominated in foreign currency and freely open to foreign investors—the B share market was the first hole in the Currency Wall, but only 120+ firms have issued B-shares compared to the 1,400+ that have issued A-shares).

I’m sure Morgan Stanley could have raised a billion dollars if they’d had that large a quota from SAFE.

Xinhua reports on the fund’s debut here in Chinese and here in English. Their article quotes Morgan Stanley’s
CEO saying the firm hopes to secure a license to fully operate as a securities company within China.

The fund’s prospectus is here. The risk factors section is here. An explanation of how this fund differs from a mutual fund is here. The Fund’s NYSE symbol is CAF.

Blogged with Flock