The demand travelling south-to-north far outstripped that in the other direction – as expected from a programme that allows foreign investors more access to domestic Chinese stocks – with 50% of the Hong Kong allowance used within 15 minutes compared to 16% of Shanghai’s by the day’s end.
Regardless, while the launch itself attracted all kinds of folderol, what is of more importance are the long-term benefits, particularly for UK investors, as Laith Khalaf, senior analyst at Hargreaves Lansdown, explained.
“China is increasingly opening its doors to international investment, and yesterday marked a significant step towards that end,” he said. “Should this integration continue apace, it is likely to lead to the domestic Chinese market playing a greater role in the portfolio of UK investors, and potentially inclusion in the market indices compiled by the likes of FTSE and MSCI.
“UK fund managers will now find it easier to invest in Chinese A-shares. In the short term this is only likely to affect Asia Pacific funds and emerging markets funds.
“But longer term, if the A-share market opens up sufficiently to make it into the global market indices of FTSE, MSCI and other providers, it would mean greater exposure through both global index tracker funds, and global active funds, which use these indices as benchmarks.”
Though Chinese companies are relatively lacking in regulatory guidelines against their international counterparts, Khalaf believes that growing interaction with outside investment could necessitate a higher level of scrutiny.
He said: “Increasing institutional investment could also lift levels of corporate governance among Chinese companies in the longer term, as global investors are likely to demand observance of international standards from the boards of China public limited companies.”
The Shanghai-Hong Kong market is worth around USD $3.8trn (£2.4trn) compared to FTSE All Share Index cap of slightly more than £2trn.
While there are still some trade restrictions, Frank Yao, senior portfolio manager in the Neuberger Berman Greater China investment team, expects a slackening of the current limitations.
He said: “The program does not include securities traded on the Shenzhen Stock Exchange, which represents roughly 40% of the China A-share opportunity set (based on market capitalisation), nor does it include Shanghai-listed equities that are not part of the SSE180 and 380 Indices. This means that foreign institutional investors would still need QFII, RQFII or market access products to invest in these other equities. We believe the restrictions will be loosened over time,”
But with regulators preparing for a rise in international investment, along with plans to launch a Shenzhen-Hong Kong connect programme as early as next year, Yao said the existing limitations are far less stringent than pre-Connect measures.
He explained: “Until now, foreign access to China A-shares was restricted to those investors with Qualified Foreign Institutional Investor (QFII) or Renminbi Qualified Foreign Institutional Investor (RQFII) quotas, or to those with access to brokers’ QFII quotas through ‘market access’ products.
“Historically, approval for QFII and RQFII quotas took six to twelve months, while market access products came with hefty transaction costs in periods where demand outstripped supply. Foreigners can now access A-shares in a more efficient, cost-effective way.”
So now that investors have been granted easier access to the world’s second-largest equity market, how should they approach it?
Khalaf advised: “Investing into a specialist China fund is for brave investors only, who already have a well-diversified portfolio. Investment trusts can use borrowing to enhance returns in rising markets.
“But the flip side of this approach is it also adds risk in an already volatile area. Smaller and mid-cap companies could enhance growth prospects but is likely to increase volatility too.
“A more measured way to gain exposure to China is to invest in a more diversified Asia Pacific fund, which also invests in the likes of India, Taiwan, South Korea, and others.”
Alphabet soup – a guide to the stocks
H-shares: stocks of Chinese companies listed in Hong Kong that are open to foreign investors. There are 223 of these stocks, which are traded in Hong Kong dollars and other currencies with a combined market cap of USD $632bn (£404bn).
A-shares: stocks of Chinese companies listed in Shanghai or Shenzhen that have restricted access to foreign investors. A total of 2,475 stocks are traded in Chinese Yuan, and have a combined market cap of USD $3.8tn (£2.4tn).
B-shares: stocks of Chinese companies listed in Shanghai or Shenzhen that are open to foreign investors and traded in US dollars or Hong Kong dollars. However, the market is small, with 102 stocks and a cap of USD $23bn (£14.7bn).
Red chips: stocks of companies who conduct the majority of their business in China but are incorporated outside the country. The companies are open to foreign investors, but are at least 30% owned by Chinese entities, including the state. They are traded in Hong Kong dollars on the Hong Kong exchange, which has 148 stocks with a combined market cap of USD $621bn (£397bn).
