17 Nov 2014

Helen Zhu

 

After months of anticipation, the Shanghai-Hong Kong exchange link has finally debuted on 17 November 2014. The program is yet another step reaffirming China’s commitment to reforms and opening its economy to more foreign investment.

While most of the easy arbitrage opportunities have been exploited and the large discounts on Hong Kong listed H-share closing over recent months, the long term potential offered by the exchange link is one that investors cannot ignore. The Shanghai exchange’s total capitalisation is USD2.9tn, making it the seventh largest stock exchange in the world, just behind the HKSE, which has a capitalisation of USD3.1tn. There are 982 companies listed in Shanghai and while some also have a dual Hong Kong listing, these tend to the larger names in sectors such as financials and energy. The exchange link will provide investors with access to a wider range of mid-cap companies in sectors such as consumer discretionary, consumer staples and industrials which are more likely to be the beneficiaries of ongoing reforms and shift to domestic consumption.

An equivalent link for the smaller the Shenzhen stock exchange (market cap of USD1.9tn) is expected to be created created in the next one to two years, opening up further opportunities in areas such as technology and healthcare, including Chinese traditional medicine.

As an asset class, A-shares have several attractions:

  • Low correlation to global equity asset classes
  • Low foreign ownership (2% vs. an average Asian market average of 20-30%)
  • Gradually institutionalising market practices aimed at building a credible stock market to help raise equity value in the economy
  • Attractive valuations after a seven year bear market

China A-shares remain on the review list for inclusion in the MSCI EM index as part of the 2015 MSCI Market classification review due in June 2015. MSCI has already introduced a standalone index in accordance with normal MSCI index methodology. China’s pro-forma weight in the MSCI EM, should A-shares be included, is 30% as opposed to the current 18%.

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