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HK-Shanghai through train gathers pace: top managers' views

HK-Shanghai through train gathers pace: top managers' views

This month, a long-awaited plan to link the bourses of Hong Kong and Shanghai will finally come to fruition.

The scheme will create two-way access between the stock exchanges of Shanghai and Hong Kong, subject to daily trading caps.

The through train is open to all investors, and will open the mainland Chinese equity market even further to foreign investors, who have so far been able to access the market only through the QFII and RQFII schemes.

Once the link is established, investors will be able to buy as much as $2.1 billion of Shanghai-traded stocks each day. The HK-Shanghai Connect is set to have major implications for Chinese and HK equities. Citywire Asia spoke to various fund houses to find out more.

Magdalene Miller, SLI

I think the impact will be generally positive as it will allow capital to flow more freely between Hong Kong and Shanghai equities. We have observed a narrowing of discounts and premia for stocks that are listed on both exchanges, so it appears that a lot of the impact has been seen in share prices already.

The biggest gainers will be stocks that investors cannot access in their own markets. For mainland investors, internet stocks, Macau gaming stocks and global diversifiers are likely beneficiaries. For overseas investors, consumption-related stocks with a reasonable valuation compared with their H-share counterparts, for example in the automotive or pharmaceutical areas, should benefit.

One of the biggest worries for overseas investors is the corporate governance and transparency of mainland-listed companies. Until this improves, I believe foreign investors will stick with big companies with proven track records. On the other side of the ledger, stocks that trade at a significant premium to their counterparts listed on the other exchange are likely to experience pressure from arbitrageurs.

The Standard Life China Sicav has exposure to companies that are experiencing positive changes to their profitability and cash flows, are implementing improved corporate governance, and are benefiting from the HK-Shanghai Connect.

John Ventre, OMGI

The evidence from other markets is that deeper liquidity means higher equity prices. If it’s easier to get out, then market participants are happier to continue to hold at more expensive valuations. The connect should increase liquidity and accordingly be
supportive of the market in the longer term.

We should also ultimately see the end of the A-share/H-share premium and discount effect. Although there is no arbitrage possible (Hong Kong stocks must be sold in Hong Kong and Shanghai stocks must be sold in Shanghai), we should see gaps
close as participants would rationally be expected to buy their shares wherever they can get the best price.

The big winner should be the Chinese economy. China has long needed to open its capital markets. Previous efforts have been very tightly controlled by the central government: red chips, B shares and QFII quotas are all part of that model, but the connect tie-up shows a very different kind of thinking, with the market in control rather than the central government.

We would expect demand for QFII in particular to decline with the new connect system being much less onerous. That should mean that HK brokers win out over domestic brokers. Chinese equities (through Hong Kong-listed H shares) are our biggest equity overweight.

We believe the economic transition which China is undertaking from investment-led growth to consumption-led growth will lead to slower but higher quality, more sustainable GDP growth.

When Japan went through a similar transition in the 1970s, Japanese equities turned out to be the big winners as corporate profits were returned to shareholders rather than re-invested in more infrastructure. Chinese equities might well turn out to be equally big winners over the next decade and they trade at cheap valuations, so there is limited downside risk.

Frederick Laydon, Principal Global Investors

The through train is an impressive development. But it is just the start of an exciting program. Over the next few years, the quota of the program will surely be expanded and extended to Shenzhen.

It is another example of the classically successful pattern of starting small and growing incrementally. The growth in accessibility (QFII, RQFII and now the through train) is just one aspect of China’s continued internationalisation of its markets. Reforms (state-owned enterprise reforms, for instance) are happening at a rapid pace.

The ownership of A-shares is becoming increasingly compelling. Investors should consider gaining exposure at early opportunities. 

Roxy Wong, Lombard Odier (HK)

The through train may help valuations a bit in the near term, and the valuation gap between A shares and Hong Kong-listed counterparts should narrow in the longer term.

For a lot of the illiquid small- and mid-caps listed in Hong Kong, the link may improve their liquidity in the longer term. It’s hard to quantify at the moment. But Hong Kong could become a unique place to invest in A shares that nowhere else in the world can match, at least in the first couple of years.

Listed A-shares could be found in regional portfolios in the asset management industry in the very long term. However, a lot of issues have to be addressed first such as voting rights, quotas, litigation, etc. If investors are not comfortable with the legislature in China when a dispute arises, it may limit the participation of large, international funds. 

Lilian Leung, JPM

We view this as another step towards further liberalisation of A-share markets, which are currently subject to limited access, in addition to further relaxation of QFII and RQFII quotas.

In the near term, we expect a few groups of stocks to attract more attention including quality stocks that are only listed either in Hong Kong or China. Examples include technology plays or Macau gaming shares, or vice versa some pharmaceutical and consumer names in the A share market.

Also potential gainers are dual-listed stocks with material valuation gaps including materials and industrials in Hong Kong and some financial names in A shares as well as brokers. 

Bin Shi, UBS Global AM

I think the HK-Shanghai connect will have significant impact on Chinese equities, mainly because of the different market structure and valuations in the A and H markets. The A-share market is dominated by retail investors and blue chips are trading at a big discount, even to H shares.

The H-share market mainly sees the participation of institutional investors, while small and mid-cap names are trading normally at a discount to the blue chips. The connect program will introduce new interesting dynamics into these two markets.

I expect the A-share blue chips’ discount to H shares to narrow, and small- and mid-cap names in the H-share market will probably benefit from increased investor interest and better liquidity. 

This article originally appeared in the October issue of Citywire Asia magazine

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