Shanghai-Hong Kong Stock Connect: what's the impact?

Stock Connect is changing China's equity markets, find out how

by Bin Shi 01 Nov 2017

Shanghai-Hong Kong Stock Connect – in 60 seconds

  • Shanghai-Hong Kong Stock Connect connects the Shanghai and Hong Kong Stock Exchanges and allows international and mainland Chinese investors to trade shares on both the Hong Kong and Shanghai exchanges;
  • Shanghai-Hong Kong Stock Connect started on November 14, 2014 to improve market access for international and mainland China investors, open up China's equity markets and make cross-border trading more efficient;
  • Stock Connect means no lock-up or repatriation restrictions, and capital can be deployed quickly;
  • The launch of Stock Connect was a major reason why onshore China equities (A-shares) were included into the MSCI Emerging Markets index;
  • By the end of September 2017, foreign investors owned RMB 656.2 billion of onshore China equities, up 50% y-o-y, according to the People's Bank of China 

What was A-share investing like before Stock Connect?

We are quite familiar with the A-share market and have been investing in it since 2007, initially through the QFII program and later through the RQFII program.

Prior to the launch of the Shanghai-HK Connect, overseas investors could use the QFII program to invest in mainland stocks.

However, the QFII program has lock-up and repatriation restrictions, which is quite unusual in developed markets. A lot of investors are not used to these kinds of restrictions and are not willing to participate.

In practice, sending money in and out of China through QFII program happens with a time delay, which can be a challenge for portfolio managers as well.

Stock Connect: what difference has it made for China A-share investors?

With the Stock Connect program, there is no lockup and no restriction on repatriation.

The daily cap on total quota is more than enough to accommodate most investors’ needs. Capital can be deployed quickly and access to the A-share market has never been easier. As such, investors’ interest in the A-share market has increased significantly.

Now, three years after the launch of the Shanghai-Hong Kong Stock Connect, a total of 576 (1) stocks on the Shanghai Stock Exchange (SSE) are currently available for overseas investors to trade, according to the most recent data published by Hong Kong Exchanges and Clearing.

When coupled with the 943 stock names available from the Shenzhen Stock Exchange (SZSE) through the Shenzhen-Hong Kong Stock Connect launched in December 2016, global investors now have a greater range of stock investment choices than ever before.

Sending money in and out of China through QFII happens with a time delay, which can be a challenge for portfolio managers as well. With the Stock Connect program, there is no lockup and no restriction on repatriation

Stock Connect: what has it meant for UBS?

The A-share market has its own unique characteristics and its unique opportunities.

The Shanghai-Hong Kong Stock Connect allows investors in Chinese equities to deploy the capital the best way they see fit, no matter where they are listed, US, HK, Shanghai or Shenzhen. 

This means that not only our offshore Chinese equity funds are able to access to the A-share market, but many other funds such as emerging market funds and global funds have access to the A-share market as well.

We have actively participated in the Stock Connect program and it has been a very rewarding experience for us. Not only have our funds benefited from the blue chip rally in the A-share market, but we have also started a product that invests in the A-share market, using the Stock Connect program only.

Stock Connect opens the door for All China equity strategies. Watch Bin Shi explain why here

What does Stock Connect mean for China's financial markets?

The Stock Connect program makes access to the A-share market much easier than before and we think it played a very important part in the decision of including A-shares into the MSCI Emerging market index.

In addition, global investors' participation also changed the structure of the A-share market significantly to make it more mature and more fundamentally driven, which is very beneficial to the long term growth of the A-share market. As such, the Stock Connect program is an important step in the globalization of China's financial market.

How have international investors responded to Stock Connect?

Because of these changes, foreign investors are increasing their investments in mainland markets.

Aggregate figures at the end of September showed that total foreign holdings of A-shares reached RMB 1.021 trillion, a 50% increase from the RMB 656.2 billion recorded at the same point in 2016, according to data compiled by People's Bank of China (3).

Source: People's Bank of China, October 2017

What can we expect from Stock Connect in the future?

While the Stock Connect program has been running quite smoothly, we expect more developments in the future. We expect more product categories to be opened to foreign investors and China's financial markets to become more closely integrated with both global practices and the global financial system.

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