Foreign holdings in China A-shares soar 30 times under Stock Connect
The Stock Connect between mainland China and Hong Kong has given global investors various options to allocate more into Chinese equities since it started operating seven years ago last month.
As of November 11, daily average trading volume (northbound) under the Stock Connect Scheme reached Rmb122 billion, a 35% jump from the same time last year. The figure for southbound transactions stood at HK$44 billion, representing an 87% increase year-on-year.
Since the launch of the connect scheme, northbound transactions with a trading volume of Rmb64 trillion have been recorded, along with HKD23.1 trillion for southbound. The scheme has contributed a net inflow of Rmb1.5 trillion and HKD2.1 trillion into mainland A-shares and H-shares, respectively, according to Hong Kong Stock Exchange (HKEX) data.
“After a slowdown in 2020 due to the Covid-19 outbreak, northbound Stock Connect saw Rmb346.6 billion in net flows so far this year, very close to 2019’s record high of Rmb351.7 billion, reflecting continuous demand for Chinese A Shares despite recent regulatory crackdowns, the Evergrande debt crisis and geopolitical tensions,” Yoon Ng, senior director of APAC insights at Broadridge, a financial technology service provider, told AsianInvestor.
Ng believes the growing demand for A-shares is not going away.
“Based on HKEX’s data, Hong Kong and global investors held a total of Rmb2.6 trillion in A-shares listed on the Shanghai and Shenzhen exchanges as of 10 November 2021, compared with merely Rmb86.5 billion as at the end of 2014. The popular sectors include medical/biotech, new energy, electronics/computers, mechanical equipment, power equipment, basic chemicals and non-bank finance,” she added.
The scale of asset allocation to China’s domestic equities markets is significant, even if foreign shareholdings account for a fraction of the total shares. As of October, the MSCI Emerging Markets Index and FTSE Russell Emerging Index feature 34.7% and 37.9% asset allocation toward Chinese equities, respectively, more than any other country.
International investors held Rmb7.5 trillion of equity and fixed income securities priced in renminbi at the end of September, up about Rmb760 billion from the end of 2020, according to Financial Times calculations.
Chinese domestic fund managers have been one of the main drivers of southbound activity.
“Since 2020, they have increasingly launched many new funds investing partly in Hong Kong-listed stocks, particularly in the new economy sectors including tech, biotech/medicine and new consumption. The trend has been accelerated by the Hong Kong listings/dual listings of some of the best Chinese tech companies,” Ng told AsianInvestor.
Latest headlines, including Didi's delisting from the US exchange, also provide more room for Hong Kong's exchange where more companies could consider a new listing.
"When the enhanced concession for the secondary listing regime becomes effective on January 1 next year, I expect more US-listed Chinese concept stocks will be coming to Hong Kong for their secondary listing platform," Mike Suen, partner at law firm Withersworldwide, told AsianInvestor.
"In addition, the continuing tensions between China and US will cause extra motivation for these Chinese concept stocks to move to Hong Kong. Listing of biotech companies under Chapter 18A of the Listing Rules will continue to be boosted in the coming year as evidenced by the number of current listing applications (about 17 as at end of November) in the pipeline," he added.
Suen also believes the exchange should be ready to publish its conclusions on the consultation on SPACs in late December or early January 2022.
The link was first launched in November 2014 between the Shanghai and Hong Kong exchanges and was extended in late 2016 to include the Shenzhen market.
The latest expansion last November saw the three markets agree to expand the scope of eligible stocks traded under the Stock Connects Scheme to include eligible A-shares listed on the SSE’s [Shanghai Stock Exchange] Sci-Tech Innovation Board (Star Market) as well as eligible pre-revenue biotech companies listed in Hong Kong.
But investors cannot ignore the latest headlines coming from Chinese regulators and market participants.
“Investors need to be selective. But look carefully and they can find quality Chinese businesses on the right side of the policy agenda delivering strong growth. Growth in domestic consumption remains a strategic priority for Chinese authorities, so quality consumer stocks as well placed to withstand regulatory headwinds,” James Thom, senior investment director for Asian equities at abrdn, wrote in a commentary.
Thom wasn't too worried about China's economic outlook.
"Investors can rest assured that Beijing has levers to pull in the event that economic conditions become less stable. Bear in mind, much of China’s growth slowdown is self-imposed via restrictions in property and energy sectors and the common prosperity push," he added.