The first-ever introduction of two qualified foreign institutional investor (QFII) firms recently has triggered a flurry of excitement on China's dreary stock market.

Small and medium-sized holders - the majority of the domestic A-share holding population - hailed the admission of Swiss investment bank UBS Warburg and Japanese stock house Nomura Securities Ltd as "a piece of favourable news." It is something the Chinese stock market has been desperately wanting for the past several years when the stock market has slumped.

Economists, however, admonished them against a short-sighted desire for instant gains, saying "the real significance of allowing in QFII lies in their ability to help transform the investment philosophy in the domestic market and setting an example for abiding by market rules."

Both profit-yearning investors and moral-telling economists have based their optimism on wishful thinking.

It was reported the total funds injected by QFII firms would not exceed US$1 billion this year - a tiny amount compared with the huge Chinese stock market. One cannot expect it to constitute a substantial boost to the sagging market.

And there were negative examples in South Korea and Taiwan, where the introduction of QFII in the early 1990s caused a drop rather than a rise in their stock bourses.

UBS Warburg and Nomura will certainly set examples when they choose to buy shares from among 1,200 listed companies. And which companies they choose will be eye-catching. Both foreign investors are reluctant to reveal any information in this respect. They said only that they will focus on those companies with good fundamentals such as management, financial conditions, profit-earning ability and accounts transparency.

These are nothing new. All stock buyers will be concerned about these essential factors. The problem with China's stock market is that most shareholders place too much attention on speculative factors such as inner secrets and so-called expert opinions rather than on company records.

Unfortunately, even if they want to know, they do not have easy access to the information. False, ambiguous and delayed reports as well as insider trading and other irregularities have placed ordinary holders in a helpless situation. That helped worsen the mentality of investors for speculation.

Listed companies are also in a strong speculative mood. For many of them, the main concern is to reap as much money as possible in the shortest possible period of time by incessantly issuing new and additional shares rather than honouring their obligations to shareholders.

The key to the problem is that both investors and listed companies should change their attitude and adopt a healthy mentality. In this regard, overseas QFII firms may bring useful experience.

The chief representative of UBS Warburg's Beijing office said: "To choose the right share, one has to base the judgment on solid research." A researcher of the Swiss firm said his company might not favour companies that are performing well. "We will evaluate the listed company by studying its long-term record of reasonable growth," the researcher said.

Taking a long-term point of view and engaging in solid research are the keys to success for most players in mature markets. Perhaps the QFII players can teach us a lesson in this regard. If so, the introduction of QFII will prove really significant.

(Business Weekly 06/10/2003 page1)