18th November 2014
A massive $2.1bn poured into Chinese stocks in a single day this week as restrictions were lifted on the domestic A-share market.
This release of demand was possible due to Monday’s launch of the long-anticipated Shanghai Hong Kong Connect programme, which allows foreign investors greater access to domestic Chinese stocks.
It got off to a roaring start, as buyers reached their daily quota of 13 billion Yuan before the trading day closed.
The A-share market comprises of around 2,500 companies, listed on Shanghai and Shenzen exchanges, worth in total around $3.8 trillion, according to JP Morgan.
Laith Khalaf, senior analyst at Hargreaves Lansdown said: “To give some context the FTSE All Share Index has a market cap of a little over £2 trillion or $3 trillion. However, only 568 Shanghai stocks are tradable through the Connect programme.
‘China is increasingly opening its doors to international investment, and yesterday marked a significant step towards that end. 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.”
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 plc added Khalaf.
What does all this mean for investors?
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.
How to invest in China
Investing into a specialist China fund is for brave investors only, who already have a well-diversified portfolio. Popular investment trusts in this area include Fidelity China Special Situations and JP Morgan Chinese Investment Trust.
Khalaf said: “These 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. Fidelity China Special Situations is also heavily skewed towards smaller and mid-cap companies, this 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. We like First State Asia Pacific Leaders and Aberdeen Asia Pacific in this area.”
Funds like these investment trusts and unit trusts invest in China via a number of means, including domestically-listed A-shares, but also through H-shares listed on the Hong Kong exchange, and others where appropriate.
The Shanghai-Hong Kong Connect programme explained
This programme is a link between the Hong Kong and Shanghai stock markets, allowing a certain amount of money to flow in both directions. This allows foreign investors to invest up to 13 billion Chinese Yuan a day in Chinese A-shares, subject to a maximum total limit of 300 billion Yuan.
Not all A-shares are available through the programme – it covers constituents of the SSE 180 Index and SSE 380 index, plus a few others. Shenzen stocks are not included.
The programmes is two-way, allowing mainland Chinese investors access to Hong Kong exchange stocks too, although the first day for the southbound trade proved underwhelming, with around 80% of the daily quota unused at the close of play.