China desperately needs asset managers

Last week’s turbulent share trading in China has been one of the top trending news stories in the financial world and the Chinese government is pulling out all the stops to prevent this crisis turning into a catastrophe, but it might be time for a change of tactics.

While almost everyone had something to say on the topic, one of the best points I saw was from Fidessa’s Steve Grob, who rightly pointed out that a market dominated by huge government institutions on one side and a mass of retail investors on the other end of the spectrum was sorely lacking in one crucial ingredient that Western markets benefit from, institutional investors.

While the barriers that stood in the way of international institutions have been slowly eroded over recent years, most notably with the introduction of Stock Connect, it is still a highly restrictive market for foreign investors to access.

Worst of all, the Chinese government seems likely to introduce greater regulation in response to a Crisis which, after another tough day of trading on Monday, has seen the CSI 300 index fall to its lowest level since the aftermath of the summer 2015 crisis.

The response to the last crisis was to introduce a circuit breaker on 4 January which was triggered on its first day of operation, shutting down markets, and culminated in it being abandoned on Thursday after markets managed a mere 29 minutes of trading, quite possibly one of the shortest trading days ever seen.

While circuit breakers are a feature of many markets across the world, many market participants have complained that the Chinese circuit breaker – which would suspend markets for 15 minutes when key indices dropped 5% and close them once losses hit 7% -was far too restrictive.

This is where China’s vast swathes of retail investors that dominate its markets come into play. Many will have – upon hearing of the widespread losses – have been in touch with their stock brokers to get out of their positions as soon as possible. With the circuit breaker preventing them from unwinding their investments on one day, many will have likely felt even greater urgency to try and get out as soon as possible in the following days, triggering the circuit breaker once again and feeding into further panic.

Who can blame them? If you’re watching the money you hoped would send your children to school or fund your retirement suddenly disappear down the drain, the urge to make a swift exit is tempting to say the least.

And this is where a developed, diverse and mature institutional investment community is vital. While retail investors with a short-term and relatively unsophisticated view might be rushing to get out, many institutional investors will be going the other way, looking to capitalise on better prices and liquidity and helping to stabilise the market.

Time will tell what the Chinese government opts to do, but any move that further excludes or discourages the international asset management community would a grave error, one that could ultimately drive the world back into a recession, just as the recovery is finally getting going.