Major step signals opening of Chinese equity market
On 10 April, at the Boao Forum in Hainan, Premier Li made a major announcement that somehow received fewer echoes among Western investors or in overseas media than I expected. “Mutual market access” is a breakthrough in opening up mainland China’s capital market and implies a further step in a major shift of global financial funds to China.
Until now, access to the mainland’s A-shares market has been restricted by the Qualified Foreign Institutional Investor’s program. There are around 200 foreign institutions with a QFII license and quota. East Capital was the first asset manager in Northern Europe to be awarded such a license, which we used to launch the East Capital A-shares Fund last December. Chinese domestic institutional investors and asset managers have another program for overseas investments called QDII. This program, however, has not been successful as it was launched right before the global financial crisis and led to big losses.
The new program, dubbed the “through train program,” will likely start in six months. It allows mainland investors to trade Hong Kong-listed stocks, while foreign investors are able to buy Shanghai-listed A-shares on the Hong Kong exchange. There will be trading limits (on daily and annual net trading volumes) but the amounts are almost as big on the northbound channel via the QFII program (annual quota of RMB 300bn, or USD 40bn) and half as big on the southbound channel via the QDII program (RMB 250bn vs USD 540bn). Furthermore, the new program does not require individual investors to have a license or a specific quota. All trading and settlement will be done in RMB, which is also significant for currency internationalisation.
Besides the market’s immediate reaction − a rally in stocks of securities companies and sharp moves in dual-listed stocks − we believe that in the long run this will improve overall investor sentiment. Hong Kong listed companies familiar to mainlanders but not currently available to domestic investors, such as Tencent, Lenovo and SaSa, will benefit. Furthermore, differing investment styles may converge to some extent: domestic investors love growth stocks and small caps, and this may very well lead to an increase in volatility on the Hong Kong market.
There is another very important implication that we believe may be one of the reasons behind this program. A few weeks prior, we were contacted, alongside other peer investors, by the leading index provider MSCI to give our opinion on the potential inclusion of A-shares on some indices. This would start in May 2015 with a small factor to match the gradual opening of the market, and progressively increase to as much as 10% of the MSCI Asia ex Japan, provided the market is fully liberalised. The “through train” is clearly an important step on this road map. At the end of the road, the current weight of China in the MSCI Emerging Markets Index might go from 19% to 28% and, if and when Taiwan and Korea are upgraded to developed markets, the accumulated weight of Chinese equities in the MSCI Emerging Asia Index could be a staggering 50%! Global investors will be forced to allocate more time, effort and money to China in general and the A-shares market specifically. It is a very interesting market that favours our investment themes such as consumer goods and healthcare, and offers exciting opportunities in areas that East Capital is already very familiar with.
