Everything went as expected at the launch of the Shanghai-Hong Kong Stock Connect yesterday, said consulting firm Z-Ben Advisors: northbound volumes far outweighed southbound ones; the one-day trading cap was hit; and most of the flows were from the likes of retail investors and asset managers trading for their own books.
As anticipated, there was comparatively little participation by institutional investors, largely due to delayed clarification of issues around capital gains tax, noted Z-Ben.
The ease with which the Shanghai Exchange accommodated inbound Connect flows would help allay any remaining fears, said the firm, but some asset owners would wait to see the effects of the first sales by northbound traders before committing.
There are of course other reasons why institutions are not using the link as yet. French insurer Axa, for example, does not yet have an allocation to A-shares, and in any case it can use its qualified foreign institutional investor (QFII) quota to access the wider market, said Arnaud Mounier, the firm’s Asia CIO. It was too early to say whether Axa will use the scheme, he added, noting that it had no plans at present.
Still, Z-Ben predicted that there will be at least $20 billion in northbound volumes by the year-end as a result of tax certainty and growing comfort levels, but that the overall programme cap of Rmb300 billion ($49 billion) would not be reached by that date.
The Rmb13 billion one-day cap was hit by 2pm local time for northbound trades, while only Rmb1.8 billion of the southbound was used on the first day, noted Patrick Ho, deputy head of equity for Asia Pacific at UBS Wealth Management Chief Investment Office. The first day went smoothly, with no serious technical glitches, he added.
Certain stocks benefited in particularly, as had been predicted. Northbound flow favoured non-dual-listed names with relatively undervalued blue-chips in China – including SAIC Motor, Kweichow Moutai, Daqin Railway – all greatly outperforming the market, said Ho.
The scheme could expand to encompass the Shenzhen exchange and commodity and fixed-income bourses as soon as 2015, he added. But it is the scheme’s long-term impact – including the potential for China A-shares and American depositary receipts to be included in global indices such as the MSCI – that will have the most profound effect on the market, said Ho.
Yesterday’s trading pattern will be useful as an indicator of the next six month’s activity through the Connect but not as a particularly good guide to future participation, said Z-Ben.
“We would not be at all surprised to learn that prime brokers and hedge funds originated more than 60% of today’s northbound trades, a proportion that we expect to see fall within the next two weeks as offshore institutional investors begin to establish China positions through the Connect.”
That group will include current users of the QFII and renminbi QFII schemes, Z-Ben added. Some of these will see the Connect as a means of achieving daily liquidity to complement their existing exposure, said the firm, while others intend to experiment with all available platforms to meet their strategic priorities.
Meanwhile, Friday’s announcement of an extended tax holiday for foreign investors, including for QFIIs and RQFIIs, led to various providers of exchange-traded funds, such as BlackRock and CSOP, saying capital gains tax (CGT) provisioning for their China-focused ETFs would stop as of yesterday for exposure via CAAPs (participation notes written for offshore investors with A-shares as their underlying instrument) or direct A-share investments, and withholdings from open positions released back in the net asset value.
But long-established QFII fund managers, alongside ETF manufacturers, have work to do before they can make definitive decisions about the disposition of the money they have withheld for prior-year CGT, said Z-Ben. It may be weeks or months before those funds are disbursed, either to investors or to mainland tax authorities, it added.