Every foreign investor worth his name in salt wants to buy more and more into Chinese stocks. This despite the lack of transparency, and so many rules and regulations, limits on buying. Yet, global funds are going all out to increase their investments in China – it remains the favorite destination when there is talk of emerging markets.

Have you heard of Han’s Laser Technology? It is listed on the Shenzhen stock exchange and the China barred foreigners from buying more shares in this stock as global investor holding is almost close to the 30% cap on international ownership of a single stock. The cap is at 10% for a single shareholder. Offshore investors’ holdings in Han’s Laser Technology increased 13% in one year through Stock Connect, a trading platform used between the Hong Kong, Shanghai and Shenzhen stock exchanges. Foreign holdings through Stock Connect and the Qualified Foreign Institutional Investor program reached 28.2%.  Shenzhen stock exchange has instructed its Hong Kong counterpart to halt purchase orders until Han’s Laser foreign ownerships falls below 26%. Can we imagine RBI or SEBI doing this? Aren’t our markets more mature in that sense where FII limits are periodically hiked when the limit is reached?  So on one hand, the Chinese Govt wants foreign investment but only as per its term – where, how and how much.

It is very likely that in the next couple of weeks, we will hear more such stocks reaching the upper limit and a clamp down coming in. More foreign cash is expected to flow in as index provider MSCI is increasing the weight of A shares in some of its indices, experts noted. Thus Beijing’s lack of trust when it comes to non-Chinese ownership of local companies could lead to many FIIs losing out on good investment opportunities. Yet, they do not crib or threaten to leave the Chinese markets if the Govt does not correct this perception. And if we had the same limits in India? Surely, we would have been labelled as regressive and so many more names.

And this brings us to one big question – how do the Chinese exchanges work and despite these issues, how come FIIs flock in droves? If one looks at the almost rudimentary and very controlled way of trading, it seems preposterous that people even compared India and China when it comes to trading.

Yet, there is this constant talk of India and China. Any time, there is any data or story on growth, the two are inevitably compared; to a point of obsession in India. But both the countries are as different as oranges and apples. Right from the culture, food, way of life, infrastructure, governance; everything is different. And frankly, the Chinese economy is so far ahead of India, that it really makes no sense to compare the two.

A small background – till November’14, Hong Kong was the gateway into China and one could invest in the Chinese stocks, which got listed via an IPO on the Hang Sang. But after November’14, a new exchange opened in Hong Kong - Shanghai-Hong Kong Stock Connect, which is a partnership of China’s Shanghai Exchange and Hang Sang. Here, even the huge Chinese companies could trade and thus FIIs gained access to invest into the public sector companies of China.

And here registered FIIs can directly buy and sell stocks. But in China – foreigners can buy shares in Shanghai by first going through a broker in Hong Kong who then must go through the Hong Kong Stock Exchange and will thus gain access to Shanghai stocks. That’s not all, investors have to place their order to buy or sell one day in advance thus limiting their ability to react quickly to market-moving events.

FIIs cannot invest directly in mainland China - on the exchanges at Shanghai and Shenzhen? Well, they can but again with conditions. There are two categories of shares – ‘A’ shares which can is only for Chinese nationals and only in renminbi. Some Qualified Foreign Institution Investors can trade but that also is restricted to a quota. Then there are ‘B’ shares, which are open for all and can be traded in US dollar or Hong Kong dollars. B shares are as the name suggests – very poor quality companies and thin trades. Thus FIIs prefer the new Shanghai -Hong Kong Connect.

Though there is now the ease of buying through Stock Connect, there is the tricky question of legality Though the shares are bought by FIIs they are purchased on their behalf by a Hong Kong exchange subsidiary – so what happens to investors when they want to recover assets from failing companies?

Also since the time that Stock Connect started, the traffic has been largely one-way – FIIs in less than two years have poured in $86 billion to buy Chinese stocks. It has never been tested as to what happens when they want to exit all or major part of their holdings?

Well, having said all this, doesn’t it then seem like a wonder that the FIIs, who crib about the smallest of issues in India, rush in droves to China? And maybe that is the crux of the issue – what is the lure of China? Maybe the sheer size of the country and economy, the opportunity to make money, in whatever way possible. Even though there is no corporate governance and transparency is a joke?

FIIs are not faithful husbands – ‘till death do us apart’ types. They are rich Casanovas and whichever market is more attractive, they will go and park themselves there. It is only Ram Leela and no Amar Prem. So does India look attractive today?