The tremendous growth of the Chinese economy and stock market has many wondering how long it will take before China once again regains it spot as the top economy (The Business Insider). When looking at purchasing power parity, some analysts are expecting that China will regain the crown as the top economy by 2015, after 125 years of the U.S. holding the number one spot. Yet for China and any other global market or economy to be a long-term destination for investment, further transparency and disclosure will no doubt be necessary. Just yesterday I discussed some recent academic research that found investors tend to trade foreign equities more often than their domestic counterparts (Bull Bear Trader). In short, the authors of the study found that the level of trading is higher for stocks in markets for which there are weaker investor protections, or for markets that have lower disclosure standards. The portfolio turnover or churn rate was higher as the quality of information and level of familiarity decreased.

This information appears to not be lost on some international markets. Wealth Briefing Asia reports that as investor look across the globe for alternative investments, they will demand more in-depth information on investment products in the wake of the recent financial crisis. To meet this need, services are already being offered to help investors discover transparent managers, and regulatory bodies are increasing requirements for transparency within various markets. Both the demand and the will seem to be in place, yet more will have to be done, with such transparency continuing down to the company level as investor seek assurances regarding future investments. This is happening in Japan, where after two decades of poor returns, Japanese investors are beginning to challenge management teams that are not delivering for shareholders (Financial Times).

Therefore, as investors continue to look for alternative investments and ways to diversify globally, international markets will need to increase transparency as the economic links between the U.S., China, Japan, Europe, Brazil, India, and Russia, among others, continue to grow. In doing so, markets will be able to lower equity turnover rates (Bull Bear Trader), thereby reducing volatility and allowing them to attract the type of long-term investment and capital necessary to grow their markets. Whether China continues to rises to the level of market leadership is still to be seen, but even if the U.S. retains it top position, a more transparent market in China and elsewhere will help all markets given that full decoupling has not happen, and will most likely never fully occur in the new global market place.

Approximately two-thirds of fund managers recently polled by HSBC are overweight in Chinese equities, higher than the 50 percent that were long Chinese equities in Q4 of 2008 (see Asian Investor article). The companies polled were 12 funds with some of the largest assets under management, including (in alphabetical order) AllianceBernstein, Allianz Global Investors, Baring Asset Management, Deutsche Asset Management, Fidelity Investment Management, Franklin Templeton Investments, HSBC Global Asset Management, INVESCO Asset Management, Investec Asset Management, JF Asset Management, Schroders Investment Management, and Societe Generale. Of the funds increasing exposure in Asia, some mention their belief that the stimulus plans of China and Singapore will help support demand and growth in each country. One fund manager also mentioned that the construction and basic materials sectors will serve as a guide for the impact of the Asian fiscal packages, since each will benefit early from planned spending in infrastructure, and should lead to trickle-down effects to consumers. Others are not so sure about the trickle-down effects to Chinese consumers, and also mentioned that while having China rebound will be necessary to help spur global growth, such a rebound may be a few quarters away, at best. Still, most agree that the stage is set given that China appears to have put in place an actual stimulus plan - something the markets in the United States are still questioning domestically.

In an effort to help boost its struggling stock market, the Securities Regulatory Commission in China is scheduled to sign-off on a plan that will allow short selling and margin lending (see Bloomberg article). The government is hoping that the changes will add fresh capital to the equity markets. China has also recently eliminated its tax on stock purchases and has relaxed company buyback rules. The move is in stark comparison to orders in the U.S., Europe, and Australia that have recently placed limits on short-selling. It is ironic that China, often criticized for being less open, appears to be offering free market solutions for its declining markets at the very time other economic superpowers are increasing trading restrictions within their own markets. The next year should be interesting, and telling, as countries about the globe take different approaches towards bolstering their economies and strengthening their capital markets.

China had another stellar period of growth as its GDP rose 10.6% in the first quarter. Unfortunately, consumer prices in China climbed 8.3% in March, driven by the usual suspects. The government did not hesitate, immediately raising reserve requirements to 16%, taking additional currency out of the system. Analysts at Goldman Sachs believe it will not be enough, and that China's central bank will need to further raise interest rates and implement even higher reserve requirements. In the mean time, higher currency gains are expected as rates increase. Whether the Chinese central bank can raise rates faster than the currency is appreciating is still to be seen.

The NY Times is reporting that a new law in China could impede the Microsoft deal for Yahoo if things progress beyond August 1st, once a new Chinese anitmonopoly law takes effect. Yahoo's 40% stake in Alibaba.com could cause the problem. Beyond the Microsoft-Yahoo deal, this new law could place China in a position similar to the U.S. and European Union with regard to regulatory oversight. Increased cross-investment will only continue to complicate regulatory matters.

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