The Hong Kong government's decision to add the Shanghai and Shenzhen stock exchanges to its list of approved stock exchanges last week is set to deepen the exposure of the city's pension funds to mainland-listed stocks, but it will take time to see a shift in assets, say experts. 

The decision, which was effective on November 13, removed the Mandatory Provident Fund (MPF)’s 10% investment limit on China A-shares. Previously, MPF funds, which managed about HK$1 trillion ($129 billion) worth of retirement assets, were only allowed to invest a maximum of 10% of their net asset value into A shares.

Francis Chung,
MPF Ratings

Janet Li, Mercer’s wealth business leader for Asia, noted that, from an investor’s perspective, the inclusion will uncover more A share opportunities for their pension funds.

“Over the long term, the inclusion [of A shares] will give fund managers a broader investment universe for diversification, which should provide better risk-adjusted returns for retirement,” Francis Chung, the chairman at MPF Ratings, told AsianInvestor.

Given that there are now several Hong Kong and mainland China connect schemes, the links between the two markets will become deeper, Li added.

The Shanghai and Shenzhen stock exchanges have 1,565 and 2,317 listed companies respectively. Their combined market capitalisation totalled Rmb72.8 trillion ($1.02 trillion) as at November 15. The Hong Kong Stock Exchange’s market value stood at HK$45.6 trillion ($6.9 trillion) with 2,153 companies listed on the main board.

However, the new rules have yet to set off a rush of investment into A-shares.

Experts said any significant capital inflow would likely take some time, given A shares’ current high valuation. Additionally, funds will require time operationally to deploy capital.

WAIT AND SEE

As of November 17, the Shanghai Stock Exchange Composite Index stood at 3,300, up 24% from 2,660 on March 23, the lowest point this year. Meanwhile, the Shenzhen Stock Exchange Composite Index was at 9,691 on March 23, and the index has since gained 42%, rising to 13,732 to-date (November 17).

Janet Li, Mercer

Li said A shares may see some near-term corrections.

“A shares have gained quite a lot this year and may see an adjustment in valuation. Fund managers are likely to consider relative valuation before officially adding A shares into their products,” Li said. Overall, MPF should remain a long term and diversified retirement scheme, she said.

According to MPF Ratings' data, an estimated 93% of monthly net MPF inflows were invested in Hong Kong and China equities in September, and in October, an outflow of 26.4% was recorded. Among all MPF fund types, Equity Fund (Hong Kong and China) represents almost 24% of the total market share in terms of fund size. 

“The data appears to suggest MPF members are using MPF for short-term speculation rather than long-term retirement planning,” Chung added, “This year, among Hong Kong and China equity funds, we saw larger changes in capital inflows and outflows, compared to previous years.” 

Chung said the volatility in the flow of funds is a concern, and members of the scheme should keep in mind that the MPF is a long-term retirement fund, and not a short-term speculative tool.

Industry Share of 1-month MPF Net Inflows from July 2018 to October 2020

Industry Share of 1-month MPF Net Inflows from July 2018 to October 2020
Source: MPF Ratings
 

20TH ANNIVERSARY

The MPF system has been in operation since December 2000. As it approaches its 20th anniversary, scheme members are hoping to see some changes.

“The regulator is aiming for the trustees to onboard the e-MPF platform in phases between 2023 and 2024, which should help to increase the effectiveness and lower the operational cost [for scheme members],” said Li.

She also mentioned that the government’s long-term goals should be to encourage higher voluntary contributions and increase the mandatory contribution.

“But the pandemic and rising unemployment rate means that reforms could take longer than expected since contributors are more concerned about immediate needs rather than their future retirement plans,” she said.

As at the end of March this year, the annualised rate of net return of the MPF system since its inception was 2.6%, according to the scheme authority’s annual report published in August.