The passage in the U.S. House of Representatives last month of the bill to grant China permanent normal trade relations is an important symbolic step for Chinese reformers to use to encourage capital market liberalization, said Ian Beattie, fund manager, WorldInvest Ltd., London.
He said the bill, which still must pass the Senate, would not have an immediate, direct impact on the capital markets. "But if the bill stumbles, it would be a negative."
"Reformers can use this (bill) as another impetus for structural change in China," including the eventual opening of the large, so-called A-share stock market to foreigners, he said.
"PNTR is a stepping stone to the WTO (World Trade Organization membership)," he added. "WTO implies there should be a dismantling of the distinction between foreign and local investors."
Pedro Marcal, partner and co-lead manager for emerging countries strategies at Nicholas-Applegate Capital Management, San Diego, agreed, saying, "This (bill) helps accelerates reforms."
"It's part of the transition from a state-run economy to a more free-market economy," he added. "We investors view that as favorable."
But he has no opinion on how quickly the A- and B-share markets in China would be merged.
The much larger, local currency A-share market is closed to foreigners, who are restricted to the illiquid and tiny B-share market.
Together, the A shares that trade in the markets of Shanghai and Shenzhen have a market capitalization of $458 billion, while the B shares that trade in the two markets have a market cap of $19.7 billion, Mr. Marcal said.
"The Chinese recognize foreign investors want to invest in large, efficient, profitable companies," he said. As a result, he said China is listing companies attractive to foreigners in major markets like Hong Kong and in New York.
Mr. Beattie noted, "One problem with China is the capital side is very underdeveloped. The trade side is developing quicker. China really needs to become more efficient in the way capital is distributed. One of the reasons for the Asian crisis was the misallocation of capital."
He doesn't think the capital market liberalizations will affect Hong Kong. "The market is big enough to have two major markets," he said.
WorldInvest has $250 million in emerging market equities, including Chinese stocks listed in Hong Kong.
Nicholas-Applegate has about $1.6 billion in emerging markets, including about $60 million in Chinese stocks, all listed in Hong Kong or in other countries.