Recent weeks have seemed a case of one step forward, two steps back in the evolution of China's A-shares market from retail-dominated casino to an institutional engine of corporate finance and price discovery.
From a longer-term perspective, however, it could be two steps forward, one step back.
The Shanghai Stock Exchange composite index ended the week at 3,160.17, down almost 40% from a June 12 high of 5,166.
The government, meanwhile, has continued to stumble in its attempts to short-circuit that sell-off, which has persisted for 10 weeks — following a 150% surge during the preceding year.
Its latest moves have escalated to include arrests, detentions and public confessions.
Away from the show trials, though, regulators have been accelerating steps that promise to strengthen the local market's institutional investor base over time.
On Aug. 24, regulators announced the country's public pension funds, with more than 3.5 trillion renminbi ($550 billion) in assets, will be allowed to invest up to 30% of their portfolios in domestic equities, easing rules that had restricted them to bank deposits and local government bonds.
At a subsequent news conference, You Jun, vice minister of China's Ministry of Human Resources and Social Security, estimated 30% of 2 trillion renminbi in public pension money — or roughly $100 billion — could find its way to domestic stocks.
That followed a move by the China Insurance Regulatory Commission lifting the equity allocation ceiling for local insurance companies to 40% from 30%.
And on Aug. 31, the China Securities Regulatory Commission and other regulators urged listed companies to consider steps, including mergers and acquisitions, boosting dividends and share buybacks, to make their shares more attractive to investors.
For now, with China's leadership seemingly behind the curve in responding to a significant slowdown in the country's torrid growth of recent decades, investors are accentuating the negative.
Amid growing pessimism that China's economic overseers might not prove “capable of controlling this crisis,” many investors who had been intrigued by the market as it rallied during the 12 months through June have decided it's “not worth the effort” for now, said Qi Wang, Hong Kong-based partner and advisory director with MegaTrust Investment (HK).
The latest monthly data on quotas under China's qualified foreign institutional investor program showed total quota capacity edging up $100 million to $76.7 billion in August, with a lone award of $400 million to BlackRock Inc. offset by 10 other QFII holders returning a combined $300 million in quotas granted in previous years.
Among them, Columbia University returned $44 million of an $85 million quota. Scott Schell, a New York-based spokesman for the university, said officials declined to comment.
Another QFII holder, Singapore-based APS Asset Management, saw its quota go to $230 million from $243 million. Wong Kok Hoi, the firm's founder and chief investment officer, noted in an e-mail that under the QFII program's rules, “when our investors redeem and repatriate capital, the QFII quota (has) to be returned.”
Even so, Mr. Wong pointed to the reforms in August that have opened the door for local pension investments in stocks as something “very positive” for the “long-term capital development” of a Chinese equity market where retail investors trading on “rumors and stories” still account for 80% of turnover.