SHANGHAI (Reuters) - China's top securities regulator, who has for months been trying to revive the domestic stock market, is finally hitting a sweet spot among local investors by playing to their traditional investment mentality.
Retail investors, who make up the bulk of the Chinese domestic market, have never favored bargain-hunting at or near the bottom of a cycle. But they are starting to return to the market after foreign money scooped up shares, specifically blue-chips, in record amount last year.
On Monday, Guo Shuqing, the chairman of the China Securities Regulatory Commission (CSRC), stoked expectations that authorities will continue to rapidly open up the main channels for overseas fund inflows, further lifting market sentiment.
"This is a huge boost to market confidence," retail investor Qi Junjie said in his microblog. "Foreign troops are finally coming to liberalize China's stock market."
Guo told a forum on Monday that quotas for so-called Qualified Foreign Institutional Investor (QFII) and the local-currency denominated Renminbi Qualified Foreign Institutional Investor (QFII) schemes could increase by 10-fold, although he did not specify a time frame.
Mainland China shares hit 7-1/2 month highs on Tuesday, with the CSI300 index .CSI300 of the top Shanghai and Shenzhen A-shares surging more than 20 percent since early December alone on signs that China's economy was regaining traction.
While foreign money still only accounts for around 1.5 percent of the overall mainland China equity market, the psychological impact that QFII money has had on local investors over the past months is significant.
"QFIIs with fresh quotas came in and started buying blue chips such as banking shares, which were really cheap at the time," said Jin Lin, analyst at Orient Securities, referring to the Qualified Foreign Institutional Investors.
"That triggered renewed interest from domestic funds."
Over the past year, Guo made numerous attempts to breathe life into the stock market, which has fallen for two of the past three years. Regulators have slashed trading taxes, urged companies to pay cash dividends and repeatedly said that China's blue-chip stocks were undervalued and worth investing in.
But investors had turned a deaf ear until late last year when authorities drastically expanded the QFII scheme, handing out a record $66.3 million in quotas in the October-December quarter.
A 10-fold increase to the QFII and the RQFII schemes would translate to over $400 billion in new funds flowing into the market, currently worth $3.83 trillion, a very likely possibility , said Howhow Zhang, analyst at fund consultancy Z-Ben Advisors.
"If you look at other emerging markets such as India, Brazil and Russia, foreign participation is between 10 percent and 20 percent. In China, the current quota is tiny, so a 10-fold increase is not an exaggeration." He said.
The current situation draws many parallels with the lead up in events to the bull run of 2005/06 although many analysts say the current rally is unlikely to be as big as the previous one when it rose by 6-folds.
"The situation at the time was very similar. The market was heading south. Many policies came out, but didn't work," Zhan Long, CEO of Bank of Communications Schroeder Fund Management Co, told a forum recently.
"Then, QFIIs came in and made a lot of money. People later began asking why regulators allowed foreigners to buy at the bottom. The answer is that Chinese money didn't want to buy stocks at the bottom."
$1 = 6.2192 Chinese yuan