The opening up of the domestic Chinese A-share stockmarket has been declared a “huge investment opportunity”.
The Shanghai-Hong Kong Stock Connect initiative came into force yesterday, forging a pathway to the domestic Chinese stockmarket for the first time to an international audience.
China had recently begun giving certain asset management firms very limited access to the Shanghai-based A-share market with the award of a Renminbi Qualified Foreign Institutional Investor (RQFII) licence.
But the new Connect initiative will open up the market, which is home to a large number of consumer, healthcare and industrial stocks, to a much wider audience.
Matthew Vaight, manager of the M&G Asian and M&G Global Emerging Markets funds, said the opening up of 568 new companies with a combined $2trn (£1.3trn) market cap was “a huge investment opportunity”.
“The imminent opening of the much-anticipated Shanghai-Hong Kong Stock Connect is a significant development that will change the way investors access Chinese financial markets,” he said.
Nitesh Shah, research analyst at ETF Securities, said the facility would “substantially increase market access, allowing investors to take advantage of the growth opportunities that exist [in China]”.
The Connect initiative will not make the Shanghai index fully available for international investors, but will instead allow each investor a certain quota of shares.
The MSCI China A index, which tracks the Chinese A share market through indices such as Shanghai but is inaccessible to most investors, has significantly outperformed the MSCI China index recently.
Since the start of July, the MSCI China A index has risen by 31 per cent in sterling terms compared with a 13 per cent rise in the MSCI China index, according to data from FE Analytics. Managers expect this strong performance to continue when the market opens up.
Jonathan Pines, manager of the Hermes Asia ex Japan Equity fund, which has an RQFII licence, said he had been ramping up his exposure to A shares in recent months to take advantage of the market opening up to new investors.
He said with many stocks that are listed both on the A-share market and in Hong Kong, the A-share listing has traded on a discount to the Hong Kong listing, giving the example of Ping An Insurance, whose A shares are on a discount of 8 per cent.
Mr Pines said he had been increasing his A-share exposure to take advantage of such discounts narrowing.
Mr Shah agreed the opening up of the A-share market would mean that “pent-up demand for Chinese domestic equities will drive [it] higher on the opening of the Connect initiative”.
But not all managers will be rushing to take advantage of the wealth of new stocks available.
Mr Vaight said he was unlikely to dive straight into the A-share market and was instead “inclined to wait and ride out the uncertainty in this new market before potentially trading”.
One issue for potential investors is that, while market regulations in Hong Kong are broadly similar to those in the UK and the rest of the developed world, there are far fewer protections for investors in mainland Chinese stocks.
Mr Vaight said “corporate governance practices and standards of disclosure” were “hugely variable” in the market.
‘Southbound’ flows could be more important
Most of the focus behind the new Connect initiative has been on the ability of foreign investors to buy into mainland China, but Artemis’s Simon Edelsten argued that might be overlooking a more important development.
The new pathway opened up between Hong Kong and Shanghai flows both ways, so the new rules today mean that Chinese citizens can now invest more money in foreign assets.
Mr Edelsten said the restrictions on overseas investing had led to wealthy Chinese people being stuck with little to invest in, contributing to the speculative property boom in the economy.
He said the opening up of “southbound” flows – money out of China rather than “northbound” flows into China – would benefit China by stopping asset bubbles from forming, and also the wider economy as Chinese wealth flows into international assets.
Shanghai stocks opened up for investment
Baosteel
One of the main attractions of the Shanghai stockmarket, Baosteel is one of the largest producers of steel in the world. The state-backed company has benefited from the breakneck pace of China’s economic expansion and the resultant need for steel for construction.
But the firm has recently embarked on a “strategic transformation” to diversify its business “from iron and steel to materials, from manufacturing to services, and from China to the world”. It was listed in Shanghai in 2000 and in spite of rumours that it would seek a secondary listing in Hong Kong or New York, it has stayed beyond the reach of most investors until now.
Daqin Railway
First listed in Shanghai in 2006 with a market capitalisation of $1.9bn, the Daqin Railway Group operates several railway lines in mainland China. The most famous railway operated by the company, the one from which it has taken its name, is a 653km line stretching from coal mining city Datong to the port of Qinhuangdao.
The line is used to transport coal and has seen the annual volume of the material carried on its trains rise from 20m tonnes in 1995 to 440m in 2011. As well as increasing the volume of materials carried on its lines, Daqin is also looking to grow through acquisitions, having bought a controlling stake in the Taiyuan Railway Bureau in 2010.
Ping An Insurance
While it is not one of the only stocks available through the A-share market, Ping An is an example of the arbitrage opportunities that some investors may look to take advantage of now the Connect initiative is in place. Several companies, such as Ping An, are listed in Shanghai and Hong Kong but, due to the differences in investor accessibility and different regulatory and tax rules, the A shares are trading on a large discount to the Hong Kong shares.
Managers have said this discount has closed significantly in many stocks this year as investors looked ahead to the opening up of the A-share market, but Hermes’ Jonathan Pines thinks some companies, such as Ping An, could still see its A-share discount close.
