China approves new mainland access route for overseas investors

China’s government has approved Shenzhen-Hong Kong Stock Connect (SZ-HK Connect), another trading initiative providing foreign investors with access to mainland Chinese companies’ equity.

The go-ahead was announced by Premier Li Keqiang at a Chinese state council executive meeting today, 16 August.

“The preparation for the launch of Shenzhen-Hong Kong Stock Connect has been basically completed, and the State Council has approved its implementation plan,” he said.

The exact launch date is expected to be announced soon.

Asset managers welcomed the Chinese government’s decision to go ahead with the scheme, saying it marks another important step in the country’s capital markets’ opening to global investors.

“Within three months, the Shenzhen Connect will offer retail and institutional investors full access to one of the most attractive pools of investment opportunities in the world,” said Francois Perrin, portfolio manager, and Karine Hirn, partner at East Capital, an asset manager, in a joint statement.

“Welcome to the world of the Chinese private companies, welcome to the 21^st century, made in China,” they said.

As part of its latest review, index provider MSCI recently decided against including mainland Chinese shares (A-shares) in its benchmark emerging market index, and the East Capital specialists suggested MSCI will look favourably on the Chinese government’s decision on the additional stock exchange link when the index provider next considers its stance on A-shares’ inclusion.

The Shenzhen-Hong Kong Stock Connect is based on the Shanghai-Hong Kong Stock Connect, which was piloted in 2014 and has been in operation since then.

The Shenzhen Stock Exchange (SZSE) was established in 1990, a year after the Shanghai Stock Exchange, and is the largest and most active domestic equity market in China, according to East Capital.

Helen Wong, chief executive, Greater China, HSBC, noted that the Shenzhen-Hong Kong Stock Connect should provide investors around the world with access to “China’s new generation of private sector companies listed in Shenzhen, including an array of innovative internet and technology players based in the Pearl River Delta.”

East Capital’s Perrin and Hirn expect overseas institutional investors to focus more on the Shenzhen stock  exchange than Shanghai’s.

Aidan Yao, senior emerging Asia economist at AXA Investment Managers, said that the state council’s approval of the trading link was anticipated, with onshore/offshore equities having rallied in recent days.

In addition to via the Chinese government’s stock exchange connection programme, now boosted with the pending launch of the SZ-HK, overseas investors can invest in mainland China via quota programmes, such as the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme.

AXA IM’s Yao said that the stock connect programme differentiates itself from the quota programmes by “the clean design of the system that minimises official interference and maximises investor inclusion”.

He said the only restriction imposed by the Stock Connect programme is on Chinese mainland retail investors wanting to trade on the Hong Kong stock exchange (so-called southbound trades), and that it is therefore much more inclusive than the quota programmes, which are available only to selective institutional investors.

APG, the €424bn Dutch asset manager, cited the size of China’s markets and the ongoing efforts to open them when speaking to IPE about a co-operation arrangement it recently agreed with €131bn Chinese asset management company E Fund Management.