Eye­ing the Oc­to­ber ‘through train’ link

China Daily (Canada) - - HONGKONG - By LI XIANG in Hong Kong lix­i­ang@chi­nadaily.com.cn

The pro­gram to link the Shang­hai and Hong Kong stock ex­changes, ap­proved by main­land reg­u­la­tors in April, will al­low in­vestors on the main­land and Hong Kong to trade shares in each other’s mar­kets through lo­cal stock bro­kers. It could also mean greater ac­cess to the main­land’s eq­ui­ties for over­seas in­vestors as they could in­vest much eas­ily in the A-share mar­ket through Hong Kong.

At present, over­seas in­vestors can only ac­cess the main­land’s eq­ui­ties through the qual­i­fied for­eign in­sti­tu­tional in­vestors (QFII) and ren­minbi-de­nom­i­nated equiv­a­lent (RQFII) pro­grams, and that too, un­der cer­tain quota cap man­aged by the main­land se­cu­ri­ties reg­u­la­tors.

“The mar­ket will see dra­matic change af­ter the start of the pilot pro­gram. It will be a good op­por­tu­nity as over­seas funds could en­ter the A-share mar­ket and in­vest on a much-cheaper val­u­a­tion,” said Li Dax­iao, chief econ­o­mist at Yingda Se­cu­ri­ties Co Ltd.

De­spite Bei­jing’s move to sub­stan­tially ex­pand the quota for for­eign in­vestors in the A-share mar­ket, which stood at $94 bil­lion at the end of May, the for­eign cap­i­tal share in the mar­ket re­mains tiny, ac­count­ing for only less than three per­cent of the mar­ket’s to­tal $3.2 tril­lion cap­i­tal­iza­tion.

Ac­cord­ing to Bloomberg News, the val­u­a­tion dif­fer­ence be­tween main­land shares traded in Hong Kong and Shang­hai on Mon­day (July 28) nar­rowed by the most in five months amid grow­ing spec­u­la­tion that an ex­change link be­tween the two bourses will lure ar­bi­trageurs (peo­ple who pur­chase se­cu­ri­ties in one mar­ket for im­me­di­ate re­sale in another in the hope of prof­it­ing from the price dif­fer­en­tial). Val­u­a­tion gaps be­tween the two ex­changes had reached the widest since 2006 on July 23 as main­land in­vestors ex­ited the stock mar­ket and in­ter­na­tional money man­agers awaited de­tails of the ex­change tie-up.

“Main­land big-cap shares are cheap and quite low in val­u­a­tion and there have been some ar­bi­trage op­por­tu­ni­ties,” Wang Wei­jun, a strate­gist at Zhe­shang Se­cu­ri­ties Co in Shang­hai, was quoted as say­ing in a Bloomberg re­port. “The sta­bi­liza­tion of the econ­omy has also fu­eled the buy­ing sen­ti­ment.”

The rally for main­land stocks in Hong Kong and Shang­hai is be­ing driven by hype and in­vestors should pare hold­ings, Hong Hao, the chief China strate­gist at Bo­com In­ter­na­tional Hold­ings Co, wrote in a re­port on Mon­day. He said the cen­tral bank’s 1 tril­lion yuan ($162 bil­lion) pledged sup­ple­men­tary lend­ing was an “ac­count­ing sleight of hand” and that in­vestors have be­come overly op­ti­mistic. The Peo­ple’s Bank of China has yet to con­firm use of this fa­cil­ity.

Prepara­tory work for the stock con­nect plan is mak- ing “good progress,” with mar­ket re­hearsals ar­ranged for bro­ker­ages in late Au­gust and Septem­ber to ver­ify readi­ness, the Hong Kong stock ex­change said in an e-mailed re­sponse to Bloomberg ques­tions on Mon­day.

“The Shang­hai and Hong Kong ex­change link is hav­ing a fairly big im­pact on the A-share mar­ket as lots of in­sti­tu­tions an­tic­i­pate sig­nif­i­cant money in­flow,” Lu Wen­jie, a strate­gist at UBS AG, was quoted as say­ing to Bloomberg by phone on Mon­day from Shang­hai. “It makes sense that money has been al­lo­cated to big-cap, blue-chip stocks such as fi­nan­cial com­pa­nies.”

Separately, it is learnt that mar­ket in­dices provider S&P Dow Jones In­dices had re­cently an­nounced its de­ci­sion not to in­clude China’s A-shares in any of its global bench­marks af­ter con­sul­ta­tion with its clients, and MSCI Inc had also said it wouldn’t in­clude A-shares in its Emerg­ing Mar­kets In­dex, which is tracked by funds worth about $1.5 tril­lion.

Both S&P Dow Jones and MSCI Inc cited con­cerns over in­vest­ment con­straints such as the vary­ing and un­pre­dictable quota re­quire­ments for the QFII and RQFII, cur­rency repa­tri­a­tion and a lack of clar­ity on the cap­i­tal gains tax struc­ture for their A-shares de­ci­sion.

An­a­lysts be­lieve that the con­nec­tiv­ity be­tween the Hong Kong-Shang­hai mar­kets will help en­cour­age for­eign in­vestors to agree to the pro­posal of adding main­land eq­ui­ties listed on the main­land stock ex­changes to global in­dices. It will also help bring in the nec­es­sary liq­uid­ity to boost the main­land’s mar­ket which has been de­pressed by fall­ing in­vestor con­fi­dence and ini­tial pub­lic of­fer­ings, they said.

“With­out an ex­pan­sion of liq­uid­ity avail­able to the cap­i­tal mar­ket, the re­turn of the strong bull mar­ket re­mains a dis­tant dream,” said Bo­com In­ter­na­tional’s Hong Hao.

Tak­ing the MSCI Emerg­ing Mar­kets In­dex for ex­am­ple, an­a­lysts es­ti­mate that if China’s A-share mar­ket be­came fully lib­er­al­ized, it would even­tu­ally com­prise 10 per­cent of that in­dex, mean­ing global in­vestors need to pump in $150 bil­lion into A-shares.

But some mar­ket ob­servers noted that a sig­nif­i­cant open­ing of China’s cap­i­tal ac­count is a nec­es­sary con­di­tion for its eq­ui­ties to be in­cluded in key global in­dices, oth­er­wise, it would be ef­fec­tively un­work­able.

“The in­dex has to be ex­e­cutable for it to be ef­fec­tive for clients, and that is the big is­sue when peo­ple talk about A-share in­clu­sion. Not un­til you have cap­i­tal ac­count lib­er­al­iza­tion does it make any sense for our clients,” Mark Wiedman, iShares global chief and a mem­ber of Black­Rock’s ex­ec­u­tive com­mit­tee was quoted by the Fi­nan­cial Times as say­ing in a re­cent in­ter­view.

“A-share in­clu­sion feels like (it is) not on the very neart­erm hori­zon,” he added. Con­tact the writer at lix­i­ang@chi­nadaily.com.cn

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