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Andrew Main - Managing Partner, Stratton Street Capital
On Shanghai’s strength & weaknesses
Shanghai has an excellent reputation for developing itself as a center for international finance, not only on behalf of Chinese companies looking to go abroad but also to support foreign companies looking to enter the Chinese market. The development of the Shanghai market remains limited by the internationalization of capital flows of the yuan. However, at this time the domestic market infrastructure is being built to support a strong domestic capital market. This in turn will support the internationalization of the yuan.
On yuan convertibility
We believe on full convertibility, which is going to take time. There will be tremendous interest in developing portfolios with a high China content in all aspects. The growth in the size of the country’s GDP is manifesting itself in the use of the yuan as a means of exchange for international trade.
We know that further internationalization will only encourage more people to invest. Easier access to the domestic market is likely to have the benefit of lowering the yield curve as more funds flow into the market.
On free trade zone
Obviously the reform tasks and liberalizing measures for the Shanghai free trade zone are in a very early stage of development. It would be prudent for us to allow others to go before us and set up the ground rules before embarking on such a major project. The guidelines do offer great opportunities, but they still remain to certain extent unknown. This will be to the advantage of those larger groups that wish to develop such a risk. However, for people like us, we suspect as a first step, we would rather risk building something in Hong Kong rather than going to such a greenfield site.
We think for the purposes of large companies and groups it will be an excellent opportunity to allow the shaping of the new rules of law and organizations.
On economic reforms
Shanghai has done much to place a firm footing under the international banking markets. These, together with the trial programs, allow people both domestically and internationally to iron out the bugs. To date, we have not marketed ourselves at all in China and have gained our advantage in performance by applying our investment process to the market. In the future we anticipate a gradual opening of markets, starting to allow RQFII allocations to portfolio management companies based out of London. This will encourage us to come to China and seek partnerships and further domestic knowledge. This is likely to be with a local partner and likely to be based in Shanghai.
Other advice
The biggest advice would be not to try and run before you can walk. Small steps will lead to successful development. Large leaps leave inherent problems as the consequences are not fully understood by those introducing them.
A strong financial skeleton of international law, accounting and administration practices will allow the development of a successful fund management industry.
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