China is set to quadruple the daily quota on the Hong Kong-Shanghai and Hong Kong-Shenzhen stock link schemes from May 1 to help ensure everything runs smoothly once MSCI’s partial inclusion of A-shares in its emerging markets index starts in June.
The daily southbound quota of the Hong Kong-Shanghai and the Hong Kong-Shenzhen stock link will be increased to Rmb42 billion ($6.7 billion) from the current Rmb10.5 billion, while the daily northbound quota will be raised to Rmb52 billion from Rmb13 billion, Yi said.
“The move to further open up is conducive for institutional investors’ participation in the A-share market,” a spokeswoman of China Securities Regulatory Commission said at a press briefing after Yi had announced the measure.
The precautionary move, however, is unlikely to immediately boost institutional investor usage of the schemes -- not according to some investment experts and senior analysts.
"In practice we're not expecting the quota expansion to have a significant impact [on fund flows into the A-share market]”, Howard Wang, head of Greater China, emerging markets and Asia Pacific at JP Morgan Asset Management, told AsianInvestor.
Gao Ting, head of China strategy at UBS Securities, and Caroline Yu Maurer, head of Greater China equities at BNP Paribas Asset Management, agreed, noting how the vast bulk of the existing daily Connect quotas were not being used up as it is.
"The current quota … is very underutilised, I don’t think it’s going to drive flows [fund inflows] per se,” Maurer told AsianInvestor.
As a result of the looming MSCI index inclusion of Chinese shares, UBS estimates that $18.5 billion in total will flow into the A-share market, of which $3.5 billion are passive funds. BNP Paribas puts the numbers at about $20 billion from active funds and $3 billion from passive funds.
First launched In November 2014, the mutual market access scheme now covers over 2,000 eligible equities in Shanghai, Shenzhen and Hong Kong. On April 11, 98% and 93% of the northbound quotas to Shanghai and Shenzhen were not used up. The unused shares southbound were 94% and 82%, respectively.
TACTICAL AND STRATEGIC DRIVERS
The Chinese government is trying to ease investor concerns ahead of the MSCI inclusion of A-shares by raising the quotas, even though a scenario of dangerously pent-up demand seems unlikely, Maurer of BNP Paribas said.
Not every investor is going to buy A-shares on the same day and investors can change their positions on the next day if the quota is used up, she said.
Passive funds will only invest in A-shares according to their assigned pro forma MSCI index weighting of 0.73% once the initial two-step inclusion process is completed, while active funds are only motivated to “beat the benchmark” and may not necessarily invest in A-shares at all if they have a bearish view on it, Gao of UBS said.
That said, if the quota stayed where it was, there might be issues for a day or two, Maurer of BNP Paribas said.
“They are trying to prevent any potential hiccups. [If], for whatever reason, suddenly a lot of active fund managers decide to ... [invest in A shares] on the same day, then that potentially will cause problems,” she said.
But there is a more strategic motivation behind the quota changes too -- to encourage MSCI to expand its representation of mainland China's markets in its benchmark equity indices.
After all, to begin with the MSCI Emerging Market Index will include just 5% of the float-adjusted A-share market cap of 222 large-cap stocks. And as Chia Chin-Ping, MSCI’s Asia-Pacific research head, told AsianInvestor last year, the question of A-share inclusion partly comes down to the removal of daily trading limits to enable more frictionless trading.
“When MSCI reviews the ratio or whether to increase the stock [inclusion], this [daily quota of the Stock Connect] will be [seen as] a meaningful change,” Gao of UBS said.
That said, MSCI is likely to wait some time, perhaps one year after the implementation of the current plan, in order to evaluate how well the Stock Connect scheme operates before it considers a wider inclusion of A-shares, he said.