Shanghai bourse link hits 100bn yuan
A man talks on the phone inside the Shanghai Stock Exchange building at the Pudong financial district in Shanghai Nov 17. Hong Kong's stock exchange has told investors it expects them to hit the limit of shares they can buy via its trading link with Shanghai by the end of March, a development that will pressure China to lift the quota to prevent the scheme grinding to a near halt. (Reuters photo)
It has taken almost three months for foreign investors to pour 100 billion yuan ($16 billion) into Chinese shares through the bourse link with Hong Kong. Value Investment Principals Ltd said the next milestone will come more quickly.
Shanghai stock purchases through the connect surpassed 100 billion yuan Tuesday as speculation that the central bank will further ease monetary policy sent the benchmark index to its biggest gain in a week. International investors have been net buyers for 16 straight days, data compiled by Bloomberg show.
Inflows will accelerate as more money managers get compliance and regulatory approval to trade through the link, according to Sandy Mehta, the chief executive officer of Hong Kong-based Value Investment Principals. Even after last year's world-beating rally, the Shanghai Composite Index is valued at 12 times estimated earnings, a 24% discount versus the MSCI All-Country World Index.
"For most investors, this market has opened up for the first time and there is a discovery process going on," Mr Mehta said. "We expect volumes to continue to increase going forward. Valuations continue to be attractive."
The exchange link was designed to open China's markets by giving foreign money managers greater access to Shanghai-traded equities and mainland investors a route to buy Hong Kong shares. There's a 13 billion yuan daily limit on purchasing Shanghai stocks, and a 300 billion yuan cap on total investments, of which 199 billion yuan remains. For Hong Kong shares, the quotas are 10.5 billion yuan and 250 billion yuan.
"We've reached a milestone, establishing a foothold for the next step," said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc. "People were disappointed with how the stock link kicked off as there were high expectations, but from a longer-term perspective investors are slowly, but steadily, increasing usage."
Hong Kong Exchanges & Clearing Ltd has pledged new trading accounts as soon as March that will allow fund managers to overcome the obstacle of transferring Shanghai stocks to brokers before they're sold, as currently required by Chinese regulations.
Hong Kong brokerages may get subsidies to offset costs from the program and fees may be cut to draw mainland investors, the China Securities Journal reported last week, citing an unidentified person from a broker.
"With improved convenience and lowered hurdles, the stock link is likely to become more active," said Okasan's Mr Oshidari. "It might not lead to a rush of funds, but a build-up of such improvements will increase usage."
For Simon Grose-Hodge, a Singapore-based investment strategist at LGT Group, easier access to Chinese equities doesn't make the market more compelling.
"After the initial euphoria and everyone buying into a market simply because they could and causing a huge liquidity rush that's now dissipated, we now need better fundamental news," said Mr Grose-Hodge, whose firm manages $126 billion. "At the moment it's a better option to wait."
Investors who bought Chinese stocks when the link started were swept up in a rally, with the Shanghai Composite jumping 36% from mid-November through its Jan 26 high.
The measure has slid 7.1% since then, amid surging volatility, signs of a deteriorating economy and tighter rules on the use of margin debt. JPMorgan Chase & Co cut its view on Chinese equities to neutral this week, ending a bullish call it made the day the stock link began.
While price swings in Hong Kong have been less severe, returns have been smaller. The Hang Seng Index is up 1.8% since the program started.
Hong Kong's exchange is considering a number of other enhancements for the stock link, chief executive officer Charles Li said Tuesday, without giving further details. The stock quota is sufficient at the moment, and if investments reach their limits the ceiling may be adjusted, he said.
Efforts to expand cross-border trading by connecting Hong Kong and Shenzhen are in the works, and the new link may start in the second half of this year, Mr Li said.
"Many clients are starting to get OK with the system," said Andy Maynard, the Hong Kong-based global head of trading and execution at CLSA Ltd "We're still looking relatively good and we're moving in the right direction as we surpass that 100 billion yuan mark."