Shanghai Rush has traders preparing for stock link rally
MONDAY, Nov 17 will be no ordinary day for China’s US$4.2 trillion stock market.
The debut of the Shanghai-Hong Kong exchange link will give global investors unprecedented access to mainland shares and put new trading systems to the test.
UBS AG says foreigners will probably buy the maximum daily amount allowed under the program, while Bocom International Holdings Co anticipates a rally. Some local investors are speculating statelinked funds will step in to ensure that shares gain on the first day.
Anticipation of the link has already propelled an 18 percent advance in the Shanghai Composite Index (SHCOMP) since Premier Li Keqiang unveiled the plan in April, making China the world’s third-best performing major stock market after India and Japan.
The connect expands access to Shanghai’s 24-year-old market from a few overseas institutional investors to anyone with a Hong Kong brokerage account, giving foreigners the ability to purchase as much as US$2.1 billion of Shanghai shares per day.
“This is a big game changer,” Mark Austen, the chief executive officer of the Asia Securities Industry & Financial Markets Association in Hong Kong, whose members include BlackRock Inc. and Goldman Sachs Asset Management, said in an interview on Bloomberg Television. “We’re very, very excited.”
Exchanges in Shanghai and Hong Kong, which have both scheduled ceremonies to mark the debut, will conduct final tests of their systems this weekend. Hong Kong will scrap a daily limit on the amount of yuan residents can buy to support the link on Nov 17. Big flows
Brokerages have been working overtime to prepare for the debut, with some waiving fees and offering prizes to lure customers. HSBC Holdings Plc said it will cut brokerage commissions to zero for mainland shares trading through the connect for as many as six months.
“We’ve recently received lots of inquiries from foreign investors,” Lu Wenjie, a strategist at UBS, said by phone from Hong Kong. “There will be quite big trading flows,” into Shanghai, Lu said.
The link will allow overseas money managers to diversify their Chinese holdings away from the dual-listed financial companies that are already available to international investors in Hong Kong.
Eligible securities include the SSE 380 Index of midcapitalization stocks, which has its biggest components in industrial and consumerdiscretionary companies. By contrast, the Hang Seng China Enterprises Index (HSCEI) has a 64 per cent weighting in financial companies. Government support
Stocks without Hong Kong listings, from industries including infrastructure and defense, may be among the biggest beneficiaries, according to Hao Hong, a strategist at Bocom in Hong Kong.
While the link will improve foreign access to mainland shares, aggregate net purchases through the program are limited to 300 billion yuan (US$49 billion).
That’s equivalent to about two per cent of the combined market value of shares in the SSE 380 and the SSE 180 Index, which is also eligible under the connect.
A lack of clarity on China’s tax policy and investor concerns over Shanghai’s rules for selling shares may curb participation next week.
Tax policy was one of several market-structure shortcomings, including capital controls and rules against same-day trading, cited by investors when MSCI Inc. kept mainland shares out of its global indexes in June. Monday gains
“The market will rally, but not as much as people anticipate on the first day,” said Qian Zhen, 28, a data-processing engineer in Shanghai who has about 150,000 yuan of investments. “Foreign investors are rational and they won’t blindly rush to the A-share market.”
The Shanghai Composite has gained an average 0.06 per cent on Mondays since Bloomberg began compiling the data in 1990. That’s the median return among five weekdays, with the gauge recording an average increase of 0.09 per cent.
Qian predicts governmentlinked funds will take steps to prop up shares if needed to ensure a gain as the link debuts. When Premier Li unveiled the program at the nation’s Boao forum on April 10, he said it will promote the “healthy development” of China’s capital markets.
Calls to the China Securities Regulatory Commission weren’t answered, while Central Huijin Investment Ltd., a state investment firm, didn’t respond to an e-mail seeking comment.
“I’ve been buying,” said Shi Jianqing, a 37-year-old private investor who works as an accountant in Shanghai.
“The government is quite sure about the link’s success and will give it lots of policy support.” — Bloomberg