Gap in Shanghai-HK share pricesto end ‘when market fully opened’
Print Edition
FOREIGN investors continue to shy away from Shanghai shares even though the benchmark composite index is on track for its best performance since 2009.
The Shanghai Composite Index surged more than 17 percent in the two weeks after the central bank of China cut interest rates to bolster economic growth.
Still, foreign investors have left most of their daily investment quota untapped since a landmark trading link opened last month between the Shanghai and Hong Kong stock exchanges.
Belle Liang, head of investment advisory for Hang Seng Bank, shared her views about the new stock link with a group of journalists.
Q: How do you interpret tepid fund flows through the stock connect?
A: We advised our customers to cash in profits after the launch date of the stock link was announced because we thought the program wouldn’t facilitate large fund flows as soon as it went live. It turns out that the actual amount is much less than we expected.
One of the reasons is that the launch date and related tax details were announced only one week before trading began, leaving many investors unprepared. I met some fund managers recently. Many of them said they would take part in the stock link but they have to get approvals first from the regulator. For example, many mutual funds are registered in Luxembourg and they have to go through some regulatory process before they can invest in China. It takes time for a new program to warm up. It took QFII (Qualified Foreign Institutional Investors) 10 years to become mature.
For the southbound link, the 500,000 yuan threshold excludes 95 percent of mainland retail investors. The remaining 5 percent are wealthy and high-end investors. As far as I know, many of them have already opened accounts in Hong Kong, which enables them to invest more freely than investment via the stock link.
Besides, the stock link is only a market infrastructure, like a bridge. Only when economic fundamentals are favorable will investors choose to cross that bridge.
Q: There is talk that QFII investors are transferring their funds to the stock link. Is that true? Do you think the stock link will replace the quota system?
A: I don’t think so. For international institutions, fund relocation involves decision-making procedures. It also takes time. And there are still limitations and uncertainties regarding the stock link. QFIIs will be cautious in making that kind of decision.
Although the stock link is more flexible in some ways, it won’t replace QFII. While the stock link program is limited to certain shares on the Shanghai market, QFIIs are allowed to invest in any shares on the Shanghai and Shenzhen exchanges. QFIIs are also able to trade bonds. In the long run, there is no need for the QFII system when the granted quota is too high to be used up.
Q: The price spread between Class A shares on China’s mainland and mainland-related H shares in Hong Kong of dual-listed companies has been narrowing. Will the stock link finally eliminate the gap?
A: It is widely believed that price gap of A shares and H shares reflects different valuations of the same stock. I don’t agree. An A share and an H share of the same company actually are different stocks with different stockholders. They are not convertible.
The major shareholder of mainland-listed A shares usually is a government that will not sell its holdings for strategic reason. Meanwhile, domestic investors are the major players of the A-share market, while H shares are dominated by international investors. They are two groups of shareholders who will offer different prices for the same company. For example, when domestic investors are willing to pay 30 times earnings for a company’s shares, international investors might think it’s too expensive.
The stock connect only opens the A-share market a little bit wider, maybe boosting the foreign funds in the market from 1 percent to 2 percent. The price gap will be closed only when the mainland’s capital market is fully opened.
Q: There is high expectation that, with the stock link, MSCI will include A shares in its global indexes next year. What do you think?
A: I don’t think the inclusion of A shares into MSCI index will happen soon. The stock link only offers offshore investors access to 568 Shanghai-listed shares. More than 1,000 stocks on the Shenzhen Stock Exchange are still off limits to foreign investors. I don’t expect the inclusion until there is similar connection between Shenzhen and Hong Kong markets.
But I think the best time for the market is when everyone is expecting the inclusion rather than when it actually happens because the reality may be disappointing. Currently, Chinese shares have a weighting of about 2 percent in MSCI global indexes. The inclusion won’t suddenly boost that proportion significantly to 5 percent, for instance. It will be a gradual process beginning at 2.3 percent or 2.5 percent.
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