6 China's Capital Markets-The changing landscape A Shares continue to play the central role in Chinas stock market story. These enminbi ( RMB)-denominated shares, which can only be traded by mainland Chinese nationals and Qualified Foreign Institutional Investors (QFlls), continue to overshadow the much smaller foreig cy B Share market, which is available to domestic retail investors with access to foreign currency, as well as to foreigner Having been eclipsed by the introduction of QFlls, the role of b shares appears to ave diminished further since the gFc and there is continued market speculation on a future merger of the a and b share markets Graph 1: Market Capitalisation of Chinas Stock Exchanges(USD, billion) 3,500 2751 1,500 1336 Shanghai Hong Kong Source: FTSE, Stirling Finance Limited, as at end March 2011 Index, a measure of the b share market, rose by a less impressive 237 percent ove that period. On average, A Shares traded at a p/E ratio of 18 as at the end of 2010, a healthy figure compared to 48 at the a Share markets peak in 2007. This also compares favourably with the current P/E ratio of 42 for the listings on the sme board in Shenzhen. The SME Board is a special board for small and medium-sized companies which wish to raise capital. Launched in 2004, it had 53 listed companies as at the end of 2010. Though the board has brought many small companies to market, it has had a bumpy ride since 2006. Slightly lagging behind the a share market, the SmE market peaked in January 2008 before dropping to a low point in November 2008. Since then, there has been a steady recovery. Graph 2: FTSE China A All-Share Index and FTsE China B All-Share Index (USD, Total Return) 18,000 16.000 8.000 4,000 2.000 FTSE China A Alkshare Index FTSE China B All-Share Index Source: FTSE Group, data as at the end of March 2011 0 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG international"), a Swiss entity. All rights reserved.A Shares continue to play the central role in China’s stock market story. These renminbi (RMB)-denominated shares, which can only be traded by mainland Chinese nationals and Qualified Foreign Institutional Investors (QFIIs), continue to overshadow the much smaller foreign currency B Share market, which is available to domestic retail investors with access to foreign currency, as well as to foreigners. Having been eclipsed by the introduction of QFIIs, the role of B Shares appears to have diminished further since the GFC and there is continued market speculation on a future merger of the A and B Share markets. Graph 1: Market Capitalisation of China’s Stock Exchanges (USD, billion) Source: FTSE, Stirling Finance Limited, as at end March 2011. 3,500 2,500 1,500 500 3,000 2,000 1,000 0 Shanghai 2,904 Shenzhen 1,336 Hong Kong 2,751 The FTSE China A All-Share Index, which gauges China’s A Share market, surged 324 percent from July 2006 to October 2007, while the FTSE China B All-Share Index, a measure of the B Share market, rose by a less impressive 237 percent over that period. On average, A Shares traded at a P/E ratio of 18 as at the end of 2010, a healthy figure compared to 48 at the A Share market’s peak in 2007. This also compares favourably with the current P/E ratio of 42 for the listings on the SME Board in Shenzhen. The SME Board is a special board for small and medium-sized companies which wish to raise capital. Launched in 2004, it had 531 listed companies as at the end of 2010. Though the Board has brought many small companies to market, it has had a bumpy ride since 2006. Slightly lagging behind the A Share market, the SME market peaked in January 2008 before dropping to a low point in November 2008. Since then, there has been a steady recovery. Graph 2: FTSE China A All-Share Index and FTSE China B All-Share Index (USD, Total Return) Source: FTSE Group, data as at the end of March 2011. Jul 06 Nov 06 Mar 07 Jul 07 Nov 07 Mar 08 Jul 08 Nov 08 Mar 09 Jul 09 Nov 09 Mar 10 Jul 10 Nov 10 Mar 11 18,000 14,000 10,000 6,000 2,000 16,000 12,000 8,000 4,000 0 FTSE China A All-Share Index FTSE China B All-Share Index © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2011 KPMG, a Hong Kong partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 6 | China’s Capital Markets - The changing landscape