16 November 2014
Josh Noble and Jennifer Hughes
China has taken another big step towards liberalising markets with plans to give individual Chinese investors greater freedom to make overseas investments through the Shanghai free-trade zone – just as the communist country opens its stock markets to international hedge funds for the first time.
Monday’s launch of the Shanghai-Hong Kong Stock Connect, which will allow investors in each centre direct access to the other’s stock market, is one of the most significant openings of China’s capital account in a decade. Wealthy Chinese investors can now start trading hundreds of stocks in Hong Kong, including international companies such as Prada and HSBC.
Separately, in an interview with the Financial Times, Han Zheng, party secretary of Shanghai and a member of China’s 25-strong politburo, said the Chinese city’s much-vaunted free trade zone was planning to let qualified individuals open capital accounts “in a gradual and orderly manner”. As part of a trial, which could begin as early as next year, individual Chinese investors would be given greater freedom to move cash overseas and invest in physical assets such as real estate as well as stocks and bonds.
His comments came as Hong Kong and Shanghai prepared for Monday’s Stock Connect launch, through which overseas funds and retail investors in Hong Kong will be able to buy a net Rmb13bn ($2.1bn) of Shanghai-listed shares a day – without needing individual approval.
“It’s transformational, it really is. It’s the single biggest event in the 15 years I’ve been in the region,” said Tim Wannenmacher, co-head of financing services in Asia at UBS. “It’s just the beginning, and it’s a big beginning.”
Hedge funds are expected to be among the most active users of the link in its early days because of their more flexible trading structures and their restricted access to date.
International access to Chinese equities has until now been tightly controlled through a system of licences and quotas. Hedge funds are not technically barred, but regulators have simply not given them approval.
“This marks a very serious and massively important point of inflection in the opening up of China’s capital markets,” said George Philips, chief executive of Hong Kong-based hedge fund Northwest Investment Management. “It’s a sea change. The smart money is going to be all over it.”
Anticipation of a surge northwards has propelled the Shanghai stock market to its highest level in three years while more than 150,000 mainland investors have registered their interest in trading Hong Kong-listed shares. Up to Rmb10.5bn in net flows south are permitted each day up to an aggregate Rmb250bn limit.
The Hong Kong Exchange, a perceived beneficiary of the increased trading volumes, is the city’s best-performing blue-chip, up 44 per cent this year.
Daily limits imposed on the Stock Connect on how much money can flow across the border in both directions adds a degree of uncertainty on whether a trade will actually be executed, which may also damp participation from the big long-only funds.
Courtesy of The Financial Times