BEIJING:  In the past few months, the SSE Composite Index has struck a downward trend. That’s bad news for many Chinese investors buying and selling shares on the SSE Board.

The circumstances do not bode well for Beijing’s efforts to cool down the hot property market. Many Chinese have poured nearly all of their savings into buying apartments, since they think that diversifying their investments into the Shanghai stock market might not bring profitable returns.

A vicious business cycle has ensued in which China’s property prices surge higher while the SSE drops further. Meanwhile, the Shanghai Stock Exchange Board of Governors has imposed quotas and stringent regulations on foreign investors.

According to the China Daily, “Shanghai Stock Exchange is the world’s third largest stock market by market capitalization at US $3.07 trillion as of May 2010. Unlike the Hong Kong Stock Exchange, the Shanghai Stock Exchange is still not entirely open to foreign investors due to capital account controls exercised by the Chinese mainland authorities.”

The restrictions are complex. The SSE issues two types of stocks: ‘A’ shares and ‘B’ shares, as A shares are priced in the local renminbi yuan currency, while B shares get quoted at US dollars. A shares were initially intended for Chinese investors, while B shares are open to foreigners.

Reforms were introduced in 2002 and 2003 so foreign investors could trade A shares, but they must receive approval under the Qualified Foreign Institutional Investor (QFII) program. As of May 2010, only 79 foreign institutional investors can enter the market, and abide by a shared investment quota of $30 billion.

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