News analysis

Enter the professionals: China letting its markets mature

China is starting to get the idea. After putting a halt to falling stocks, then buying them via its sovereign wealth funds and even attempting to regulate for safety, changes are afoot that may finally see the nation's markets mature.

According to China International Capital, the country's pension funds may invest about 100 billion yuan (S$20 billion) in domestic stocks this year as they hand over some of their money to the National Council for Social Security Fund. This could inject a good deal of institutional chutzpah into a market plagued by excessive participation of individual investors and perhaps start a virtuous cycle of allowing professionals to manage retirement savings.

Statistics on the make-up of trade in Chinese markets are scant, but the general understanding is that about 80 per cent is your average Joe, or Zhang, rather than portfolio managers who are paid to analyse companies and trends. Even last year's crash wasn't enough to abate the common man's growing love of A- shares: stock trading accounts increased 51 per cent in 2015.

The good news is that such interest has driven liquidity through the roof as well. Daily average  securities turnover has risen to as much as 10 times the amount seen just five years ago.

In June last year, volumes totalled a record 47.2 trillion yuan, almost five times that of New York Stock Exchange group companies in the same month.

Now that there is liquidity, the only thing that's missing is value investors, which tend to be funds. The number of investment portfolios has grown steadily in China but is still a far cry from other large markets.

According to the China Securities Regulatory Commission, there were 2,724 publicly traded securities funds at the end of December. The United States had 16,660  investment companies by the time 2014 drew to a close.

In North America, one of the main drivers for the existence of so many funds is the deep pool of retirement assets, and the fact that most are managed by third-party professionals.

Such people tend to jump in when a market sells off because it unlocks long- term gain opportunities, whereas most retail investors tend to panic. By outsourcing the management of its pension funds - even within the family - China could be paving the way for more money to end up under the supervision of specialists.

That may lead Chinese stocks to behave in a more mature way, and even allow for a better shot in MSCI's next global index inclusion review. If there were more big, institutional players, and more money was professionally managed, there might be no need for trading halts and other gimmicks that have turned so many global players off Shanghai.

•This column does not necessarily reflect the opinion of Bloomberg and its owners.

A version of this article appeared in the print edition of The Straits Times on July 13, 2016, with the headline 'Enter the professionals: China letting its markets mature'. Print Edition | Subscribe