China A-Shares: Too Big to Ignore

This article was written for Institutional Asset Manager and published in April 2015

In November last year, the Shanghai Stock Exchange opened up to foreign retail investors for the first time, creating an opportunity for fund managers that Goldman Sachs called ‘simply too big to ignore’.

With nearly 1000 listings in Shanghai and over 1600 listings in Hong Kong, the two stock exchanges individually rank sixth and seventh globally. However, the historic connection made between them on 17 November 2014 has effectively created a mega-bourse that is second only to New York in terms of market capitalisation.

Whilst stocks on Hong Kong’s exchange (H-shares) have always been available to global investors, stocks denominated in Chinese yuan (CNY) on the exchanges in Shanghai and Shenzhen (A-shares) had been restricted to mainland Chinese citizens and a limited number of ‘Qualified Foreign Institutional Investors.’ The Shanghai-Hong Kong Stock Connect programme has now created a ‘through train’ that allows retail investors to buy A-shares through Hong Kong, and vice versa.

There is clearly a considerable way still to go. For now, there is a cap on purchases of A-shares through Hong Kong of CNY13 billion per day and CNY300 billion in total , and corresponding limits on purchases of H-Shares through Shanghai of CNY250 billion in total and CNY10.5 billion per day. So far, only 70 per cent of the companies listed in Shanghai and 15 per cent of those listed in Hong Kong have been approved for the programme. And, until the Chinese markets are included in global indices like the FTSE, A-shares will not be an option for funds like global index trackers and global actives which use those indices as a benchmark.

This is not a short-term opportunity. As Michael Liang, chief investment officer of Foundation Asset Management, puts it: “People should not expect to make a killing overnight.” The young market is notoriously volatile: northbound traffic through Hong Kong to Shanghai hit the daily cap when Connect launched, but dropped to CNY2.6 billion two days later. The last month has seen both the biggest fall in the A-shares market since 2009 – a drop of 5.4 per cent in a single day – and a three-year record, with a 15 per cent gain in just ten days.

Yet, despite such short-term swings, there are good reasons to be positive about the outlook over the mid to long-term.