Wen/Wei Xin, Sina Finance North America columnist
Henry Fernandez has served as the chairman and CEO of Mingsheng Company for more than 20 years. As a Hispanic immigrant, he was born into a diplomatic family in Mexico and grew up in Nicaragua. From 1976 to 1979, he served as a diplomat at the Nicaraguan Embassy in Washington. Fernandez completed his undergraduate degree at Georgetown University, and has an MBA degree from Stanford University and a doctorate in economics from Princeton University.
Under the leadership of Fernandez, Mingsheng successfully incorporated China's A-share market into the MSCI World Index. He claimed to be a believer in the Chinese economy and has long recommended the Chinese market to Western investors. On November 11, 2018, during the 24th annual meeting of the National Chinese Financial Association (TCFA) in New York, the United States, Sina Finance had an exclusive dialogue with Henry Fernandez. The following is a transcript of the interview.
Sina Finance: The murder of journalist Mr. Kashuqi at the Saudi Consulate in Turkey recently is a tragedy for the entire international community. Do you think this case will affect Mingsheng's decision or progress to include Saudi Arabia in the index?
Henry Fernandez: In Mingsheng, the decision-making method of whether to include a country in the index does not include political or geopolitical factors, as long as it does not affect the barrier free investment behavior of overseas investors in this market. To some extent, the terrible murder against Kashuqi did not allow the free flow of funds into or out of the Saudi market. If there is no influence, Mingsheng's decision will not change. If there are restrictions on barrier free investment in this country, of course, we will take this into account.
Sina Finance: Recently, Chinese investors have been disappointed in the A-share market. Investors have suffered heavy losses in individual stocks, public funds, index funds and private funds. The A-share market did not even give investors the impression that they could make money. Do you have any suggestions for these lost investors?
Henry Fernandez: Yes. I think those relatively new emerging markets, such as the Chinese market, are generally more volatile. In a bull market, the market rises too fast; In a bear market, the market falls too much. For those investors who trade back and forth in the market, they should understand that the market has both a high bull market period and a high bear market period. That is a trendy business model.
Given the long-term prosperity that China has shown, it is best for investors to maintain medium - and long-term investment in Chinese companies and equity markets. Instead of worrying about the valuation fluctuations of listed companies caused by stock prices every quarter. That's not good for them. My suggestion to China is that the stock market is now dominated by retail investors, who should have a larger proportion of institutional investors, and they should have a larger proportion of foreign investors. That will modernize the stock market and help reduce the volatility of the stock market. They should institutionalize the stock market and allow more foreign investors to enter as soon as possible, because that will reduce the volatility of the market in the long run.
Sina Finance: In the previous interview, you said that you are a Chinese believer. Can you tell me what you expect China to be like in the next three to five years? Will you increase the weight of the Chinese market in the world index in the short term?
Henry Fernandez: I believe that China's economy will continue to grow significantly. The question now is whether the growth rate is 6.5%, or even higher, or slightly lower, which is already a very high figure for the world's second largest economy. In other words, for such a huge economy, such a high growth rate is unprecedented in world history. She will continue to grow, but there will be a period of high growth, there will be a period of low growth. Chinese companies that participate in the domestic economy will benefit from this. It also depends on the economic cycle. Some companies' profits will grow at a high speed, while others will grow at a low speed. So I believe that medium - and long-term investment in China is significantly attractive. Therefore, it may be a good opportunity to configure China during the period of market bear.
It is very difficult to predict what the market will be like in the next two or three years, or what the Chinese economy will be like in the next two or three years, because the market may be very optimistic or very pessimistic as it is now. In addition, it is also related to China's economic and financial ties with other regions of the world. I believe that China has begun to realize that it needs to open its capital market, so that China can be more financially integrated into the world. Although China has been highly integrated into the world economically, it needs to go through a difficult process to make the RMB, bond market and equity market more closely integrated into the world financially.
Sina Finance: What do you think is the biggest obstacle for overseas investors to invest in China? If China wants to attract more overseas investors, what advice do you have for the Chinese regulatory authorities?
Henry Fernandez: This is what we are doing. We have included the Chinese market in our global index, including Chinese large cap stocks with a market capitalization of 5%. We are consulting our clients on whether to increase the value of 5% of China's stock market to 20%. One day in the future, we will further increase this proportion to 100%, just like any other country. But we must do it step by step. We are also consulting clients. In other countries included in Mingsheng Global Index, we include not only large cap stocks, but also small cap stocks. We asked them whether they need to include Chinese small and medium-sized stocks with a market value of 20%. This process is being carried out step by step.
The stock linkage mechanism is also a factor in our decision to include a country in the global index. China's stock linking mechanism works well. It has enough liquidity. Basically, there was little friction between capital inflow and outflow. At present, there is a daily capital flow limit to specify how much capital can flow into or out of China. I hope this restriction can be abolished. There is a problem that many stocks are not included in the stock linkage mechanism. For example, if China has an IPO, it will not be included in the stock linkage mechanism. We hope that this restriction will be lifted. The CSI 300 stock index futures also did not include the Shanghai Hong Kong Stock Connect stock linking mechanism. We also hope to be open.
Another area, although it has begun to happen, we hope to see more progress in more restrictions on stock suspension. As you know, investors investing in China's equity market are investing in listed companies. They don't want to wake up in the morning and find that they are investing in private unlisted companies. Recently, the China Securities Regulatory Commission announced some strategies to limit the time of stock suspension. We hope to see that the restrictions in this regard can be stricter and the suspension time will be shorter.
This is what the Chinese regulatory authorities can do. If it can be implemented, it will attract more overseas investors.
Sina Finance: I can understand that as an index provider, Mingsheng hopes to include as many countries and markets as possible and provide too many investment tools. But do you have a standard that you cannot include in some countries and markets?
Henry Fernandez: Now, any company can be included in Mingsheng's index as long as some standards can be met. First of all, this country must have an equity market, that is, the stock market. Secondly, companies in this market must reach a certain scale and also provide certain liquidity. This is a requirement for the stock market and the country. Third, the trading rules of the stock exchange market need to be in line with international norms, such as the security of clearing, custody and holding rights. Fourth, this country must have certain accessibility. For example, you must have a certain degree of free foreign exchange, because if you want to buy shares in this country, you must first buy the local currency of this country. Therefore, the foreign exchange market must be open to foreigners.
Sina Finance: In addition to China, which country do you think investors should focus on? Which country is Mingsheng considering to be incorporated into recently?
Henry Fernandez: We usually make such decisions through a procedural process. Obviously, the two companies that have received attention are China and Saudi Arabia. Other countries will eventually be included in the index, but we must go step by step.
(The author of this article is a columnist who once worked for a large mutual fund management company in the United States.)
